CB Industrial Product (CBIP)’s 1H19 CNP of RM12.1m came in markedly below our and consensus’ expectations, at 26% each of both full-year forecasts, due to higher-than expected plantation losses and lower-than-expected POME margins. No dividend was declared, as expected. Moving forward, POME PBT margins are expected to normalize to 18-20% as costs stabilize. Cut FY19-20E earnings by 30- 24%. Downgrade to MP with a lower TP of RM0.850.

2Q19 markedly below expectations. 2Q19 registered Core Net Profit (CNP) of RM1.1m, bringing 1H19 CNP to RM12.1m which is markedly below our and consensus’ expectations, at 26% each of both full-year forecasts. The deviation mainly stemmed from: (i) lower-than-expected margins for its POME segment, which we believe was due to deferred recognition of fabrication costs captured into the quarter, and (ii) higher than-expected losses from its plantation division due to depressed CPO prices and higher operating costs. No dividend was declared, as expected.

Results highlight. YoY, 1H19 CNP fell (-70%) to RM12.1m mainly attributed to: (i) SPV segment (LBT: RM1.3m vs. 1H18 PBT: RM32.3m) due to exhausted order-book, and (ii) enlarged losses from plantation segment (9x on low base) to LBT of RM14.4m (vs. 1H18 LBT: RM1.5m) owing to lower average CPO prices (YoY: -18%) and higher operating expenses. QoQ, 2Q19 CNP tumbled (-90%) to RM1.1m arising from: (i) PBT margin compression for its POME segment (-16.7 ppt), which we believe is due to deferred recognition of parts fabrication costs (from last quarter), and (ii) widening LBT (2Q19 LBT: RM9.9m vs. 1Q19 LBT: RM4.5m) from its plantation division from higher operating expenses and lower average CPO prices (RM1,977/MT vs. RM2,000 in 1Q19).

POME margins expected to normalize. Moving forward, PBT margins for POME segment are expected to moderate to 18-20% as recognition of its fabrication costs for parts normalize. Meanwhile, its biodiesel processing plants are still undergoing refurbishment with expected completion delayed to Nov 2019 (from Sep 2019). YTD, POME’s order book replenishment stands at RM301.4m, which accounts for 79% of our FY19E target of RM380m. Moving forward, we anticipate CBIP to clinch 1-2 more POME contracts by year-end, on track to meet our FY19E target. Its current outstanding order-book stands at RM482m (POME: RM406m; SPV: RM76m), which should provide 1-1.5 years visibility.

Cut FY19-20E CNP by 30-24% to RM32.9-48.0m as we factor in: (i) higher operating costs for its plantation division, (ii) slightly slower POME billings, and (iii) lower contribution from its biodiesel plants.

Downgrade to MARKET PERFORM (from OUTPERFORM) with a lower Target Price of RM0.850 (from RM1.10) based on an unchanged Fwd. PER of 9.3x, representing -2.0SD vs. other planters’ range (-2.0SD to -1.0SD) under our coverage, due to the earnings disappointment and the drag from plantation segment caused by initial lower yields and high operating costs.

Risks to our call include higher/lower-than-expected raw material cost, higher/lower order-book replenishment, and higher/lower-than expected plantation losses.

Source: Kenanga Research - 22 Aug 2019