CB Industrial Product (CBIP)’s 9MFY19 CNP of RM12.8m came in markedly below our/consensus’ expectations, at merely 38%/44% due to lower-than-expected POME margins and higher-than-expected CPO production costs due to young palms. No dividend was declared, which was a negative surprise. Cut FY19-20E earnings by 34-20% and lower FY19E DPS to 2.0 sen (from 4.0 sen). Downgrade to UNDERPERFORM with an unchanged TP of RM0.860 based on higher Fwd PE of 11.5x.

3QFY19 misses the mark. 3QFY19 registered Core Net Profit (CNP) of a mere RM0.7m, bringing 9MFY19 CNP to RM12.8m which is markedly below our/consensus’ expectations, at 38%/44%, respectively. The deviation mainly stemmed from: (i) lower-than expected 3QFY19 PBT margins for its POME segment (+6%) vs. expected (16%) on higher production cost, and (ii) higher-than expected production costs from its plantation division due to young palms. No dividend was declared, which was a negative surprise as we had expected 2.0 sen each for 3QFY19 and 4QFY19.

Plantation remains a drag. YoY, 9MFY19 CNP fell (-75%) mainly attributed to enlarged losses from plantation segment (10x on a low base) from lower CPO prices (-15% YoY) and higher operating expenses due to its young Indonesian tree age profile. This was exacerbated by Palm Oil Mill Equipment (POME) segment’s PBT margin compression (-3ppt) from higher production costs. QoQ, despite a 10% improvement in revenue, 3QFY19 CNP fell (-39%) despite the low earnings base the previous quarter arising from: (i) POME PBT margin compression (-6ppt) from higher production costs, and (ii) tax expense of RM1.4m (vs. positive taxation of RM3.4m in 2QFY19).

Plantation lacking steam. Cost of CPO production is expected to remain high given CBIP’s extremely young palms’ age profile. Additionally, lower yields from the young trees are expected to hamper the group’s ability to capitalize on the CPO price rally (QTD: +13%). Meanwhile, YTD POME’s order-book replenishment stands at RM301.4m, which accounts for 79% of our FY19E target of RM380m. We are still hoping for one more POME contract by year-end to meet our FY19E target. Its current outstanding order-book stands at RM459m (POME: RM385m; SPV: RM74m), which should provide 1- year visibility.

Cut FY19-20E earnings by 34-20% to RM22.1-38.8m as we: (i) adjusted POME PBT margins lower (-4ppt), and (ii) increased CPO production cost (+5%) to RM2,200/MT.

Downgrade to UNDERPERFORM with an unchanged Target Price of RM0.860 based on a higher Fwd. PER of 11.5x (from 9.3x), representing close to -1.5SD from mean. Despite higher CPO prices, we think -1.5SD valuation is justified as its plantation division is only expected to break even in FY20 stemming from low FFB yields and stubbornly high operating costs due to its young palms’ age profile.

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

Source: Kenanga Research - 25 Nov 2019