CB Industrial Product (CBIP)’s FY17 CNP of RM84.0m came in below expectations, at 90% of consensus and 88% of our forecast. No dividend was announced, as expected, for full- year DPS of 6.0 sen, slightly under our 7.3 sen estimate. Lower FY18E CNP by 13% reflecting weakening POME order-book and margins, as we introduce FY19E CNP of RM90.0m. Downgrade to MARKET PERFORM with lower TP of RM1.75.

FY17 CNP below expectations. FY17 CNP at RM84.0m missed both consensus’ RM93.7m forecast at 90% and our RM95.3m estimate at 88% on slow palm oil mill equipment (POME) billings. No dividend was announced, bringing year-to-date DPS to 6.0 sen, slightly under our 7.3 sen forecast. Nevertheless, this matches FY16 DPS of 6.0 sen.

Slow billings. YoY, FY17 CNP declined 10% as POME segment’s PBT dropped 60%, although after excluding forex movement of RM34.4m, POME Core PBT was 16% weaker to RM77.7m. This is in line with the decrease in segment revenue (-17%) due to slower progress billings. Retrofitting Special Purpose Vehicles (RSPV) segment saw good PBT growth (+33%) on higher contract values, while Plantation losses narrowed 23% to RM5.8m on better performance from maturing area. QoQ, CNP slightly improved (+5%) as POME Core PBT rose 12% to RM16.7m in tandem with billing improvement of 50%, although we observed thinner margins at 17% compared to 23% in the previous quarter. RSPV PBT jumped 1.7x on billing of higher margin contracts, while Plantation losses widened 74% to RM2.5m on low production season.

“Challenging environment”. Management noted the current challenging market environment, which we think may continue in FY18 with higher raw material prices and slower pace of contract awards. We expect CBIP’s POME order-book balance of c.RM400m to support earnings for the next 1.5 years, while RSPV order-book may remain more volatile given the specialised nature of the contracts. Plantation contribution should gradually rise as young areas continue to mature.

Reduce FY18E CNP by 13% to RM88.5m as we introduce FY19E CNP of RM90.9m. We lower FY18E CNP by 13% to RM88.5m reflecting slower POME billings and slightly thinner margins. We introduce FY19E CNP of RM90.9m implying 3% earnings growth.

Downgrade to MARKET PERFORM with lower TP of RM1.75 (from RM2.10) as we roll forward our valuation base year to average FY18- 19E for lower applied EPS of 17.2 sen (from 19.5 sen), and reduce our Fwd. PER to 10.1x (from 10.9x) as we cut our valuation basis to -0.5SD (from +0.5SD) reflecting the declining order-book trend in recent quarters. While POME order-book should support earnings over the next 1-1.5 years, we think new catalysts, such as different earnings model, or above-expected order-book replenishment, would be needed to revive the flagging earnings growth trend. However, we think the downside is limited as CBIP’s net cash position of RM82.7m (15.8 sen/share) should support a decent 4.0% dividend yield.

Risks to our call include higher-than-expected raw material cost, lower- than-expected order-book replenishment, and weaker-than-expected plantation, and JVs and associates' contributions.

Source: Kenanga Research - 01 Mar 2018