We recently met with CBIP Investor Relations Mr Lim Zee Yang and came away feeling optimistic on prospects for 2017, due to: (i) recurring income potential in POME segment, (ii) RSPV order book recovery, and (iii) high CPO prices benefiting associates and JVs. We increase FY17E earnings by 5% as we expect better tax benefits to kick in next year. Maintain MARKET PERFORM call with higher TP of RM2.10 post-earnings upgrade.

Expanding POME income streams. The Palm Oil Milling Equipment (POME) order book continued to remain fairly robust, at slightly under RM500m. We understand that CBIP secured projects worth c.RM100m during 3Q16, and has an immediate pipeline of projects, including exploring a new build-operate-transfer (BOT) business model. Via the BOT model, we understand that CBIP is considering a concession arrangement whereby the company builds and operates the palm oil mill on behalf of the customer, receiving payment for each ton of FFB processed, while the customer has an option to fully purchase the mill which turns mandatory after a certain number of years. Should the idea gain traction, we are positive on this model as think it could be a win-win for planters with tight cash flow, while providing CBIP with recurring income from its POME segment aside from its turnkey projects.

RSPV order book recovery. The Retrofitting Special Purpose Vehicles (RSPV) segment order book saw good recovery in 2016, from a low of RM35m as of end-2015 to c.RM500m currently, thanks to new supply contracts for government vehicles. We understand that CBIP is exploring further supply projects and considering entering the maintenance business, which bodes well for earnings sustainability over the long run. In the shorter term, as we gather that for the RSPV segment, progress billings tend to be charged more heavily in 2H, we are optimistic that the RSPV segment should see good earnings performance in 4Q17 similar to its recent strong 3Q17 results.

High CPO prices to benefit Plantation businesses in near-term. With CPO prices hitting multi-year highs (+44% year-to-date), the company is optimistic on contributions from its plantation associates and JVs. While CBIP also has its own Plantation division, we understand that the contribution from its 8.9k planted area is still minimal given the young average age of c.3 years. Instead, CBIP expects to benefit from better JV & associates contributions, which added up to RM5.5m in 3Q16, and should see similar contribution in 4Q16.

Upgrade FY17E earnings by 5% to RM95.3m. We increase our FY17E CNP by 5% to RM81.6-95.3m. Our FY17E tax assumption is lowered to 22% (from 24%) as we gather that the company expects to see some tax benefits that should result in gradually lower tax rates over the next two years. We maintain our other order book and earnings assumptions for now, pending more details on a possible BOT model for the POME segment.

Maintain MARKET PERFORM with higher TP of RM2.10 (from RM2.00) based on an unchanged Fwd. PER of 11.7x applied to higher FY17E EPS of 17.9 sen (from 17.9 sen) post earnings adjustment. Our target PER is based on unchanged +0.5SD, reflecting the stable POME order book position which should provide earnings visibility over the next two years. However, we remain neutral on near-term outlook as steel price volatility could risk short- term margins.

Source: Kenanga Research - 16 Dec 2016