1QFY20 CNP of RM12.3m is deemed within both our (32%) and consensus’ (31%) estimates as sequential earnings decline is expected. The group has received a qualified opinion for its FY19 financial statements and we believe this may create a short-term negative perception towards the stock. POME segment is likely to remain subdued (from slow order-book replenishment and MCO impact) while its plantation division is likely to sink into losses again following the decline in CPO prices. Maintain UNDERPERFORM but with a higher TP of RM0.780 (from RM0.730) based on rolled-over FY21E PER of 9.9x (-2.0SD).

1QFY20 deemed within expectations. 1QFY20 registered Core Net Profit (CNP) of RM12.3m (+12% YoY; -37% QoQ) which we deemed within our/consensus’ expectation at 32%/31%, respectively, as we believe lower CPO price in subsequent quarters is likely to drag earnings. Absence of dividend was expected.

Dragged by POME segment. YoY, despite a 42% decline in Palm Oil Mill Equipment (POME) segment’s PBT contribution, 1QFY20 CNP improved (+12%) mainly attributed to: (i) higher CPO price (MPOB 1QFY20: +33% YoY) which resulted in a turnaround PBT of RM0.1m for its plantation division (vs. LBT of RM4.5m in 1QFY19), and (ii) lower tax expense (-46%). QoQ, 1QFY20 CNP fell (-37%) mainly stemming from lower PBT contribution (-66%) from POME segment which dived on slower project billings and sales due to the global pandemic. Note that the group has yet to secure any POME replenishment contracts for FY20.

Qualified opinion for FY19 financial statements. The group announced that it has received qualified opinion from its external auditor, Messrs. Crowe Malaysia PLT for its FY19 financial statements. The basis was due to: (i) unavailability of audited financial statements and the absence of purchase price allocation for its JV – Gulf Lubes Malaysia (GLM), (ii) unavailability of audited financial statements for its associates and JV mainly due to a delay in completion of its associates and JV’s management accounts (based on our report dated 06-May-20), and (iii) the group’s unwillingness to perform impairment assessment on bearer plant (contingent liability) with carrying amount of RM7.7m. In essence, we believe the qualified opinion may create a short-term negative perception towards CBIP.

2QFY20 sequential earnings decline expected. Given that the group has yet to secure any POME replenishment contracts for FY20 and alongside the MCO impact, POME segment is likely to remain subdued moving into 2QFY20. Meanwhile, lower CPO prices (QTD2QFY20: -15% QoQ) lead us to believe that its plantation segment could fall into the red again in 2QFY20.

No changes to our earnings estimates as results were within expectations.

Maintain UNDERPERFORM but with a higher TP of RM0.780 (from RM0.730)

based on a rolled-over FY21E PER of 9.9x, representing -2.0SD valuation justified by: (i) expected sequential losses from its plantation division due to lower CPO price and extremely young tree age profile, (ii) subdued POME segment which has yet to clinch any order-book replenishment for FY20, and (iii) the qualified audit opinion for FY19 accounts that may cast a negative perception.

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

Source: Kenanga Research - 1 Jul 2020