CB Industrial Product (CBIP)’s FY19 CNP of RM32.6m came in above both our (147%) and consensus’ (145%) expectations on higher project billings from POME segment. Plantation division is likely to remain in the red for FY20 given stubbornly high operating costs due to its young palms’ age profile, rendering CBIP unlikely to directly benefit from higher CPO price. Trim FY20E CNP by 5% on lower FFB production (dry weather impact) and introduce FY21E CNP of RM42.5m. Maintain MARKET PERFORM with lower TP of RM9.70.

FY19 above expectations. 4QFY19 registered Core Net Profit (CNP) of RM19.7m (YoY: +29x; QoQ: +24x), bringing FY19 CNP to RM32.6m (-37% YoY) which was above both our (147%) and consensus’ (145%) expectations mainly due to higher project billings from Palm Oil Mill Equipment (POME) segment. FY19 DPS of 2.0 sen was as expected.

POME segment lends a boost. YoY, FY19 CNP fell (-37%) mainly attributed to: (i) 98% decline in PBT from its SPV segment due to lack of order-book replenishment following the completion of projects, (ii) enlarged losses from plantation segment (21x on a low base) from higher operating expenses due to its trees’ young age profile in Indonesia. This was partially cushioned by improvement (+53%) in its POME segment. QoQ, 4QFY19 CNP surged (29x on a low base) on higher project billings from its POME segment, leading to 87% and c.8x increase in POME revenue and PBT, respectively. This resulted in overall group PBT margin expansion (+15.7ppt) to 17.9%.

Too early for plantation segment to contribute. Given CBIP’s extremely young palms’ age profile, cost of CPO production is expected to remain high. As a result, the division is likely to remain in the red in FY20. Meanwhile, we understand that the group’s FY19 POME order book replenishment stood at c.RM420m accounting for 111% of our targeted RM380m. Currently, the group’s total outstanding order-book stands at RM495m (POME: RM429m; SPV: RM66m), which should provide 1-year visibility.

Trim FY20E CNP by 5% to RM40.1m as we conservatively reduce FY20 FFB growth (-5%) in lieu of the dry weather impact. Meanwhile, we introduce FY21E CNP of RM42.5m.

Maintain MARKET PERFORM with a lower TP of RM0.970 based on an unchanged Fwd. PER of 12.6x, representing mean valuation. Despite higher CPO prices, we think a mean valuation is justified as its plantation division is likely to remain in the red in FY20 from stubbornly high operating costs due to its palms’ young age profile.

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

Source: Kenanga Research - 28 Feb 2020