CB Industrial Product (CBIP)’s 9M16 CNP at RM56m missed expectations, at 63% of consensus (RM88m) and 64% of our forecast (RM87m) as higher steel prices weakened Palm Oil Mill Equipment segment’s margins. Dividend of 3.0 sen was declared for 9M16 DPS of 6.0 sen, above our 5.4 sen forecast. We trimmed FY16-17E earnings by 7% and lower TP of RM2.00 (from RM2.15) post-earnings adjustment, but maintain our MARKET PERFORM call.

9M16 below expectations. 9M16 Core Net Profit (CNP*) came in at RM56m, below consensus’ RM88m at 63%, and our RM87m at 64%. Higher steel cost thinned Palm Oil Mill Equipment (POME) margins, excluding investment and forex gains/losses, to 21% (from 23%). An interim dividend of 3.0 sen was announced, for 9M16 total DPS of 6.0 sen, above our 5.4 sen forecast. This implies a YTD pay-out ratio of 57%, close to FY15 pay-out ratio of 53% and above the 3-year average of 38%.

Steel seeing impact. YoY, CNP improved 9% on a recovery in the Retrofitting Special Purpose Vehicles (RSPV) segment, which saw PBT doubled to RM15m due to higher billings on new projects. However, this was partly offset by weaker POME PBT (-8%) on softer margins, as steel prices climbed 14% YoY to c.RM2,100/MT. Associate contribution also improved 84% on better FFB volume and price improvement. QoQ, CNP rose 25% with a 189% jump in RSPV PBT due to new project billings. However, excluding investment and forex gains, POME PBT declined 29% to RM17m due to higher steel cost. JV contributions reversed to RM2.1m PBT on better production volume.

Stabilizing outlook. With quarter-to-date steel prices softening by 6%, we think the POME segment should see margin improvement in 4Q16, though full-year results could still come in weaker against 2015. Meanwhile, we understand that RSPV earnings should normalize in the quarter ahead on the completion of existing projects. We expect its plantation associates and JVs contribution to see solid YoY growth on better production and supportive CPO prices.

Lower FY16-17E CNP by 7% to RM81-91m as we adjust our steel cost assumptions higher and impute a larger minority interest portion to reflect better performance in JV plantation businesses. We also raise our dividend pay-out assumptions to c.50% (from 33%) to reflect increasing pay-out trends.

Maintain MARKET PERFORM with lower TP of RM2.00 (from RM2.15). Our TP of RM2.00 is based on an unchanged Fwd. PER of 11.7x applied to lower FY17E EPS of 17.1 sen (from 18.4 sen) postearnings adjustment. Our target PER is based on an unchanged +0.5SD, reflecting the stable POME order book of c.RM500m providing two years’ earning visibility. However, we maintain our MARKET PERFORM call as steel price volatility could lead to margin risk.

Source: Kenanga Research - 23 Nov 2016