With a strengthening order-book outlook, renewal of its pioneer status and consolidation in its plantation division, CB Industrial Product (CBIP) provides a strong value proposition as a defensive plantation counter. We raise FY19E CNP by 5%, accounting for pioneer tax exemptions. Upgrade to OUTPERFORM with higher TP of RM1.80.

Gathering steam in Engineering division. As of end-2107, CBIP recorded an outstanding order-book of RM426m and with a new Jan 2018 contract valued at RM61m, its latest outstanding order-book is slightly under RM500m with sufficient earnings visibility for 1.5 years. We expect contract flows to pick up in 2018 over 2017 as production recovery gets underway, leading to stronger demand for mill upgrades. Meanwhile, growth areas include Kalimantan and South America where high maturing acreage will necessitate new mill construction. We gather that the company continues to explore the recurring income model, which should be attractive to smaller planters that could have limited cash flow compared to larger planters.

Refreshed Pioneer tax status. We gather that CBIP has earned pioneer status which allows for partial tax exemption since Nov 2017, and this is valid for 5 years with possible extension. Although we maintain our FY18E tax assumption at 22%, we expect new projects acquired this year to be entitled to pioneer tax exemptions, and thus reducing our FY19E tax assumption to 18%, which increases FY19E CNP by 5% to RM96m. We would expect tax rates to see meaningful declines from 2H18 onwards.

Consolidation phase for Plantations. While CBIP’s own plantations saw narrowed losses in FY17A, we note that the plantation business was overall profitable with the inclusion of associate earnings. Nevertheless, management noted that it is exploring consolidation of its assets and we observe that its ample cash pile of RM150m could support further acquisitions. We estimate that at a maximum net gearing of 50%, the company could support an acquisition worth up to c.RM450m, or c.15k hectares (ha) of Indonesian brownfield area assuming a price tag of RM30k/ha.

Trough valuations. CBIP is currently trading at multi-year low valuations, with Fwd. PER of only 9.2x, compared to its 3-year historical average of 11.4x. This is the lowest valuation since Aug 2015, implying close to -2.0SD valuation from the market. We believe this is unjustified given its earnings recovery, renewed pioneer status and progress in its fledgling plantation division. We also note that in the current bearish CPO price environment, the company could prove a solid hedge against lower CPO prices with 3-year correlation of zero (please refer to chart overleaf), making the counter among the more defensive names linked to the plantation sector.

Upgrade to OUTPERFORM with higher TP of RM1.80 (from RM1.75) post earnings adjustment. We maintain our Fwd. PER at an undemanding 10.1x to updated average FY18-19E EPS of 17.6 sen (from 17.2 sen). Our Fwd. PER reflects an unchanged -0.5SD valuation basis pending new catalysts such as confirmation of recurring income streams or updates on plantation development plans. Despite our conservative valuation basis, we think current valuations could represent a good entry point for investors seeking defensive names in the sector, given its near-zero correlation to CPO price performance and net cash position supporting a dividend yield of 4.4%, among the highest within our plantation coverage. Thus, we upgrade our call on CBIP to OUTPERFORM (from MARKET PERFORM).

Source: Kenanga Research - 28 Mar 2018