Despite a slew of new contracts being awarded to CBIP recently, this has still been very much within our expectations of oil mill engineering revenue of MYR380-400m for FY15. What is needed to catalyse the stock is the patent approval for its zero discharge mill, which is still pending. We maintain our NEUTRAL recommendation with a slightly higher TP of MYR2.20 (upside 5%).

Key visit highlights: i) orders for the oil mill engineering division have started rolling in; (ii) still hoping for patent approval for its zero-discharge mill in 2015; iii) no new contract wins from special purpose vehicle division yet in 2015; and iv) slow planting progress at its plantation division.

FY15-17 earnings forecasts tweaked upwards slightly. We have tweaked our forecasts up by a slight 1-2%, to take into account our recently revised CPO price assumptions of MYR2,350/tonne for FY15 (from MYR2,500), MYR2,500/tonne for FY16 (unchanged) and MYR2,600/tonne for FY17 (from MYR2,500).

TP raised to MYR2.20. Post-earnings revision and rolling forward our valuation period to 2016, our SOP-based TP is raised slightly to MYR2.20 (from MYR2.15), based on an unchanged 9x P/E for its plantation division and 12.5x P/E for its oil mill engineering division.

No change to our NEUTRAL recommendation. Catalysts required to rerate this stock would include the patent approval for its zero-discharge mill, the potential disposal of its plantation associates, as well as stronger-than-expected growth in oil mill engineering contracts. We maintain our NEUTRAL recommendation, as we believe valuations remain fair at current levels

Key visit highlights: i) orders for oil mill engineering division have started rolling in; (ii) still hoping for patent approval in 2015; iii) no new contract wins from special purpose vehicle division yet in 2015; and iv) slow planting progress at its plantation division.

Orders for oil mill engineering have started rolling in. CBIP’s outstanding orderbook as at end-2014 stood at MYR447m. Since then in YTD 2015, CBIP has been awarded MYR180m worth of contracts and expects to clinch another MYR400-450m worth of contracts by year-end, which would bring total contracts obtained in 2015 to approximately MYR600 (vs MYR450m in 2014). Notable new customers include United Plantations in Malaysia and Sinarmas in Indonesia. In terms of revenue recognition, we expect CBIP to record MYR380m-420m worth of revenue from oil mill engineering projects in FY15-17 (up from MYR350m in FY14). This does not include the MYR60-80m recurring revenue from CBIP’s service and maintenance works.

Still hoping for patent approvals to come in 2015. While the revenue growth (mentioned above) would be reflected in PBT contributions from the oil mill engineering division, the same cannot be said of net profit contributions, as this would be negatively affected by the impact of the expiration of its pioneer tax status for its modipalm mill subsidiary from Feb 2015. Management is still waiting for the approval of its patent application for its zero discharge palm oil mill which, if approved, will enable it to obtain pioneer status for the sales of its zero discharge mills. CBIP is hoping for the patent approval sometime this year, as it is targeting to commercialise its zero discharge mill by end-2015. CBIP’s test mill is completing soon, sometime in May.

No new contract wins from special purpose vehicle division yet in 2015. Orderbook at CBIP’s special purpose vehicle division is depleting, at MYR154m as at end-2014, with no new contracts obtained so far in YTD 2015. Management is negotiating for MYR500m worth of contracts, which it believes it has a more than 50% chance of securing. If successful, these contracts would be obtained by year-end.

Slow planting progress at plantation division. In YTD-2014, CBIP planted up some 1,445ha of landbank in Indonesia, bringing total planted area at end-2014 to 6,070ha, a mere 7% of its total Indonesian plantation landbank of 86,715ha. For 2015 and beyond, management continues to have a new planting target of 6,000ha per year. We are less optimistic, projecting new planting of 4,000-5,000ha per year for FY15-17. This division posted a PBT loss of MYR9.3m in FY14, and we expect this division to continue posting losses until 2017, at the earliest. CBIP’s first mill in Kalimantan is targeted to be completed in 1H16.

Forecasts FY15-17 earnings forecasts tweaked upwards slightly. We have tweaked our forecasts up by a slight 1-2%, to take into account our recently revised CPO price assumptions of MYR2,350/tonne for FY15 (from MYR2,500), MYR2,500/tonne for FY16 (unchanged) and MYR2,600/tonne for FY17 (from MYR2,500). Risks Main risks include: i) a significant increase in oil mill engineering contracts due to a faster-than-expected economic recovery and plantation investments in Indonesia and Malaysia, ii) a rise in steel prices and the strengthening of the USD, resulting in weaker-than-expected margins for the oil mill engineering division, iii) a rise in CPO and other global vegetable oil prices caused by weather abnormalities, iv) a reversal in crude oil prices and thus, CPO prices, and v) patent approval for its zero-discharge mill resulting in the renewal of its pioneer tax status post-Feb 2015. Valuation and recommendation Maintain NEUTRAL. Post-earnings revision and rolling forward our valuation period to 2016, our SOP-based TP is raised slightly to MYR2.20 (from MYR2.15), based on an unchanged 9x P/E for its plantation division and 12.5x P/E for its oil mill engineering division. No change to our NEUTRAL recommendation. Catalysts required to rerate this stock would include the patent approval for its zero-discharge mill, the potential disposal of its plantation associates, as well as stronger-than-expected growth in oil mill engineering contracts.

SWOT Analysis

Staring from Feb 2015, CBIP no longer enjoys pioneer tax status on its modipalm mill operations. It is currently awaiting patent approval for its new technology – a zero-discharge modipalm oil mill – which, if obtained, will result in a new pioneer tax status being granted. This could extend its tax-free status for another 10 years past 2015, although there has been no new development on this at this juncture

Company Profile

CBIP manufactures and markets its patented palm oil mills and related products. It is also involved in retrofitting special vehicles and cultivation of palm oil plantations.

Recommendation Chart

Source: RHB Research - 20 May 2015