CB Industrial Product (CBIP)’s FY18 Core Net Profit (CNP*) of RM52.2m came in below expectations, at 78% of consensus and 77% of our forecast. An interim dividend of 2.0 sen was announced, bring YTD DPS dividend to 4.0 sen, in line with our full-year forecast. Cut FY19E CNP by 23%, reflecting slower POME billings and slightly thinner margins. We also introduce FY20E CNP of RM48.3m. Downgrade to UNDERPERFORM with lower TP of RM0.850 (from MARKET PERFORM; RM1.10)

FY18 CNP below expectations. FY18 CNP at RM51.2m missed consensus RM66.1m forecast at 78% and our RM67.4m estimate at 77% on cost overrun in the palm oil mill equipment (POME) segment, which led to an exceptionally low PBT margin of 6.1% vs. 16-20% on a normalised basis. This is the second quarterly disappointment CBIP has registered for FY18. An interim dividend of 2.0 sen was announced, bringing YTD DPS to 4.0 sen which is inline with our full- year forecast.

Slow billings exacerbated by exhausted SPV order-book. YoY, FY18 CNP plunged 39% as POME segment’s PBT dropped 13% owing to higher operating cost exacerbated by higher elimination of inter- segment revenue as the group is constructing its maiden palm oil mill for the palm oil plantations segment. Despite plantation segment loss before tax (LBT) of RM1.4m narrowing from RM8.4m in FY17, its plantation associate and JV companies registered higher aggregate LBT of RM3.3m vs. PBT of RM8.3m in FY17 mainly due to lower prices and production of palm products. In spite of decrease in special- purpose vehicle (SPV) revenue by 63% on lower billings, its PBT was higher by 24% due to lower overhead costs resulting in better project margins. QoQ, 4Q18 CNP slumped 78% to RM0.4m due to exhausted SPV order-book which is currently nil (vs. RM2.0m in 3Q18) and cost overrun in the POME segment.

Challenging outlook. The SPV order-book is currently nil, but we understand from the company that it will be performing regular maintenance jobs for existing clients. We are not encouraged by the group’s prospects going forward given its diminishing order-book. We expect CBIP’s POME current outstanding order-book of RM335m to contribute to earnings for next one year while SPV order-book may remain volatile given the specialized nature of the contracts. Meanwhile, plantation associates and JV may improve going forward on higher CPO prices and maturing area.

Reduce FY19E CNP by 23% to RM52.2m while we introduce FY20E CNP of RM48.3m. We lower FY19E CNP by 23% to RM52.2m reflecting slower POME billings and slightly thinner margins accounting for higher production cost. Our CPO price assumption for FY19-20 is maintained at RM2,400/MT.

Downgrade to UNDERPERFORM (from MARKET PERFORM) with a lower TP of RM0.850 (RM1.10 previously) based on an unchanged Fwd. PER of 8.5x applied to our lower FY19E EPS of 10.0 sen. Our Fwd. PER reflects -2.0SD valuation basis given CBIP’s diminishing POME order-book outlook and exhausted SPV order-book. 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 lower-than-expected raw material cost, higher order-book replenishment, and lower-than-expected plantation losses.

Source: Kenanga Research - 26 Feb 2019