CB Industrial Product (CBIP)’s 9M18 Core Net Profit (CNP*) of RM50.4m is within our forecast at 75% but below consensus at 69%, likely due to lower-than-expected billings in the SPV segment. No dividend was announced, which was out of the ordinary, but we remain optimistic that a 2.0 sen dividend will be announced in 4Q18. No changes in FY18-19E CNP of RM67.4-67.7m. Upgrade to OUTPERFORM with unchanged TP of RM1.10 as value has emerged.

Meets our forecast, but misses street’s. CBIP’s 9M18 CNP of RM50.4m came in within our forecast (RM67.4m) at 75%, but missed consensus estimate (RM73.2m) at 69%, likely due to lower-than- expected billings in the special-purpose vehicle (SPV) segment. Note that we have stripped out an unrealized foreign exchange loss of RM6.1m in our CNP calculation. No dividend was announced, which is out of the ordinary as the group normally declares dividends in 1Q and 3Q. We gathered that management is still deciding on the quantum of dividend payment at this juncture. Therefore, we remain optimistic that a 2.0 sen dividend will be announced in 4Q18, bringing FY18 dividend to our 4.0 sen estimate.

Exhausted SPV order-book. YoY, 9M18 CNP declined 10% mainly due to higher effective tax rate of 28% (vs. 25% in 9M17) on higher foreign taxes. At the PBT level, the group registered 9% growth on the back of a twofold increase in SPV PBT, despite its revenue dropping 39% on lower billings. Due to declining order-book, the group has been actively rationalising the SPV segment’s overheads, resulting in the currently higher PBT margin of 37% (vs. 11% in 9M17). However, this was mitigated by poorer performance in the Plantation segment (including its plantation associate and JV companies), which registered an aggregate loss before tax (LBT) of RM4.3m, vs. a PBT of RM11.9m in 9M17, mainly due to an 18% drop in average CPO price to RM2,343/MT in 9M18. QoQ, 3Q18 CNP halved to RM10.7m due to exhausted SPV order-book (RM2m in 3Q18 vs. RM15m in 2Q18) and lower billings in the palm oil mill equipment (POME) segment.

Expecting a sequentially better quarter ahead. While the SPV order- book is exhausted, we do not see the division sinking into losses as it should continue to receive ad-hoc and maintenance jobs of RM1-2m per quarter, also accounting that the segment’s fixed overheads amount to RM300-400k per quarter. For POME, we expect better performance in 4Q18 on higher billings sequentially and stronger margins, as costs in the segment are usually front-loaded. Outstanding order-book of the segment stood at RM336m in 3Q18, down slightly from RM343m in 2Q18, but remains supportive of our POME revenue forecast of RM364m. Overall, we expect 4Q18 to be a better quarter vs. 3Q18.

No changes in FY18-19E CNP of RM67.4-67.7m as earnings came within our expectation.

Upgrade to OUTPERFORM (from MARKET PERFORM) with an unchanged TP of RM1.10 as value has emerged following the recent sell-down. Our TP is based on Fwd. PER of 8.5x applied to FY19E EPS of 13.0 sen, which reflects a conservative -2.0SD valuation basis. We may re-look at our valuation basis when there are fresh catalysts such as POME order-book replenishment that is likely to come about by 1Q19, and further developments in its Plantation segment, which could provide long-term catalysts for revenue and earnings growth.

Risks to our call include sharp rises in raw material cost, subdued order-book replenishment, and worse-than-expected plantation losses.

Source: Kenanga Research - 23 Nov 2018