Downgrade to “Trading Sell” with lower TP of RM0.56 from “Trading Buy” and TP of RM0.78 previously; based on a 6.9x Fwd. PER on FY17E EPS of 8.2 sen. FY15 reported earnings of RM2.9m made up only 8% of our estimate due to slowerthan- expected completion of order book projects, which led to poor revenue recognition. We anticipate existing project completion to be slightly stretched over time and order book replenishment level to be slow as well.

FY15 proved a challenging year, as the group closed the year with RM69.4m revenue, far from the outstanding contract value of RM169.1m which was expected to be completed in 2015, based on the group’s IPO Prospectus. We believe the lacklustre results from the slower-thanexpected completion of order book projects was due to weak CPO prices discouraging production, particularly in 2H15 which in turn led to less frequent provision of services sought by customers. FY15 net earnings ended on a disappointing note at RM2.9m, representing only 8% of our FY15E net profit of RM37.5m.

Uninspiring start to FY16, with 3M16 generating sales of RM11.4m (- 56.6% QoQ), which we believe was due to: (i) sinking CPO production resulted from the mid-2015 droughts, and (ii) unfavorable IDR/MYR forex rates undermining forex translation from the group’s Indonesian contracts. We believe the unfavorable forex rates further compressed gross margins to 16.1% in 3M16 (-11.3 pts from 3M15) as larger projects are predominantly located in Indonesia. Overall, the recent quarter’s shaky performance barely scraped through with a net profit of c.RM5,000 as compared to RM3.1m in 1Q15 and RM2.4m in 4Q15. (refer to overleaf for details of the recent quarter’s results)

Shaky outlook. We anticipate a slowdown in CPO production in FY16, tracking close to its 5-year low production levels. We also expect further weakness in the group’s palm oil milling automation segment, evident from low rate of completion and delayed revenue recognition of outstanding order book, together with the group’s order book to be stretched into FY16 and FY17, judging by the low rate of FY15 project completion. In addition, we reduce our annual order book replenishment assumptions from RM170.0m to RM90.0m due to the greater-thanexpected impact of CPO price weakness and production on the group.

While we were unable to obtain guidance from the group’s management on the status of completion of the outstanding order books and new contracts tendered or secured, we believe our forward order book estimates is fair as it is in-line with the 2-year historical average annual contract value. All in, we slash our net earnings expectation for FY16E to RM16.1m (-46.3% from RM30.0m, previously). We also introduce our FY17E earnings of RM13.1m, weaker than FY16E’s by 18.6% on the back of a smaller outstanding order book in tow.

CBIP appears to be a better buy than DOLPHIN. Currently, DOLPHIN appears to be overvalued when compared to CBIP, its closest industry peer. Based on our FY17E valuations, DOLPHIN falls short against CBIP with: (i) lower ROE of 12.5% vs. CBIP @ 14.3%, (ii) lower dividend payout ratio of 20.0% vs. CBIP @ c.30.0%, and (iii) poorer 4-year historical CAGR of -20.9% vs CBIP @ -1.6%, dragged by weaker net earnings in FY15 for both companies. We further believe CBIP is a better alternative with less earnings risk given its 2-3 years order book visibility of c.RM500.0m against our estimate for DOLPHIN of c.RM120.0m. Furthermore, CBIP commands a strong 1Q16 balance sheet with a net cash position of RM133.0m or 25.3 sen cash/share, against DOLPHIN’s 1Q16 net debt position of RM15.4m or 6.9 sen debt/share.

Downgrade to “Trading Sell” with Fair Value of RM0.56 (from “Trading Buy” at Fair Value of RM0.78, previously). Our Fair Value is based on a FY17E EPS of 8.2 sen on a FY17E 6.9x Fwd. PER, which is at a 30% discount to CBIP’s 9.8x FY17E Fwd. PER. We believe the discount is fair given the abovementioned shortcomings of DOLPHIN against CBIP.

Source: Kenanga Research - 23 Jun 2016