CB Industrial Product (CBIP)’s 1Q18 Core Net Profit (CNP*) at RM17.5m is within both consensus and our forecast at 20%. An interim dividend of 2.0 sen was announced, as expected. No change to FY18-19E CNP of RM88.5-95.8m. Maintain OUTPERFORM with unchanged TP of RM1.80.

1Q18 CNP in line. 1Q18 CNP at RM17.5m came in line with both consensus’ RM87.4, and our RM88.5m forecast at 20%, respectively. An interim dividend of 2.0 sen was announced, making up 31% of our 6.0 sen forecast. We deem this in line, as we expect the remainder to be declared in 3Q-4Q18 in line with previous trends.

Lower Plantation contribution. YoY, 1Q18 CNP declined 29% largely on lower Plantation segment (including associates and JVs) total contribution totaling RM0.1m LBT, compared to RM5.4m PBT previously. This was due to CPO price decline and compounded by a slow production season. Palm Oil Mill Equipment (POME) segment Core PBT (ex-fair value investment and forex movements) declined by 10% to RM20.5m due to slower billings resulting in lower revenue (- 9%). Retrofitting Special Purpose Vehicles (RSVP) segment was flat at RM5.7m despite higher revenue (+11%) due to higher production cost. QoQ, CNP was flat as margin recovery in POME segment was offset by lower contribution from the RSPV segment. POME Core PBT improved by 23% to RM20.5m despite lower revenue booked (-20%) on favourable production cost decline, but this was offset by weaker RSPV revenue (-61%) and PBT (-60%) on completion of its project. Combined Plantation segment earnings broke even at RM0.1m, a slight improvement on 4Q17 combined LBT of RM1.6m.

Better POME outlook. We expect to see continued improvement in the POME division with its order-book of RM444m (from RM426m at end- 2017) seeing gradual growth. The production uptrend expected in 2H18 should raise demand for mill upgrades, while long-term growth should be supported by new areas in Kalimantan and South America. We expect moderate contribution from the RSPV division, given the more lumpy nature of contracts awarded, while Plantation division’s outlook is neutral as rising production could be offset by a weaker CPO price environment.

No change to FY18-19E CNP of RM88.5-95.8m given that earnings are in line with our projections.

Maintain OUTPERFORM with an unchanged TP of RM1.80 based on Fwd. PER of 10.1x applied to average FY18-19E EPS of 17.6 sen. Our Fwd. PER reflects a conservative -0.5SD valuation basis as we await fresh catalysts such as the recurring income model that is in the works, or further developments in its Plantation segment, which could provide long-term catalysts for revenue and earnings growth. Despite our conservative valuation basis, we continue to like CBIP as a defensive Plantation-linked counter with no correlation to CPO prices, which have a negative outlook in 2H18. We also like its strong balance sheet position with net cash of RM127.2m (8.2 sen/share) supporting its dividend yield of 4.1% (among the top 3 within our sector coverage).

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 - 30 May 2018