CB Industrial Product (CBIP)’s 1H18 Core Net Profit (CNP*) at RM39.7m is below both consensus and our forecast at 51% and 45%, respectively, due to unexpected losses at Plantation associates and JV. No dividend was announced, as expected. Trim FY18-19E CNP by 9-18% to RM80.9-78.3m amid deteriorating earnings outlook. Downgrade to MARKET PERFORM with lower TP of RM1.30.

1H18 CNP below expectations. 1H18 CNP came below expectations at RM39.7m, although it made up 51% of consensus’ RM77.1m estimate and 45% of our RM88.5m forecast. This is because we expected a softer 2H due to exhausted SPV order-book. The disappointment stemmed largely from unexpected losses at the group’s plantation associate and JV companies. Note that we have stripped out a foreign exchange loss of RM4.4m in our CNP calculation. No dividend was announced, as expected.

Dragged by Plantation. YoY, 1H18 CNP declined 20% as the group’s Plantation segment (including its plantation associate and JV companies) registered an aggregate loss before tax (LBT) of RM3.6m, vs. a PBT of RM8.5m in 1H17. This was likely attributable to a 18% drop in CPO price to RM2,420/MT in 1H18 and exacerbated by a slow production season. In addition, Palm Oil Mill Equipment (POME) segment’s PBT declined by 12% to RM34.4m, due to slower billings resulting in a 3% decline in revenue. On the other hand, Retrofitting Special Purpose Vehicles (RSVP) segment PBT doubled to RM32.3m due to front-loaded project billings. QoQ, CNP was up 27% mainly due to a 367% increase in RSVP segment as lower production costs resulted in higher project margin. This was partially offset by a 22% decline in the POME segment and widening losses in the Plantation segment (LBT of RM4.1m in 2Q18 vs. LBT of RM0.1m in 1Q18).

Order-book wearing thin. The special purpose vehicle (SPV) segment’s orderbook has been on a declining streak, shrinking from RM448m in 4Q16 to RM15m in 2Q18. There has not been any major replenishment thus far. While we do not see any major catalyst in the near term, the division is not expected to sink into losses as it would continue to provide maintenance, repair and overhaul (MRO) services, which command decent margins (c.30% EBIT). In the POME segment, outstanding order-book stood at RM343m in 2Q18 vs. RM444m in 1Q18. By end-FY18, the group aims to secure jobs for 4-5 mills to be constructed over several years in Indonesia, which would translate into RM200-250m order-book replenishment. If this materialises, the contribution would only kick in from FY19 onwards. This aside, the group’s ability to secure RM50-80m upgrading works annually is a positive factor. Plantation division’s outlook is neutral as rising production could be offset by a weak CPO price environment.

Trim FY18-19E CNP by 9-18% to RM80.9-78.3m as signs are pointing toward deteriorating earnings in the next 1-2 years, given that planters are scaling down capex and SPV order-book is almost exhausted without major replenishment on the cards. Hence, we have lowered our SPV billings assumption by 35% to RM109m. We made no changes to POME contribution and CPO price assumption of RM2,400/MT.

Downgrade to MARKET PERFORM with lower TP of RM1.30 (from OP and TP of RM1.50) based on unchanged Fwd. PER of 8.5x applied to our lower average FY18-19E EPS of 15.2 sen. Our Fwd. PER reflects -2.0SD valuation basis given CBIP’s declining earnings outlook amid exhausted SPV order-book. In addition, the expected dividend yield is decent at 3.6% compared with peers’ average of 2.2%.

Source: Kenanga Research - 24 Aug 2018