• NEUTRAL, new TP of MYR1.30 from MYR1.45, 9% downside with c.4% FY22F yield. Despite our expectation of volatile CPO prices, we believe CB Industrial Product’s plantations unit will drive growth, while engineering profits will be relatively stable. Its valuation is fair – at 7x 2023F P/E, in line with its peer range of 6-11x, but its ESG score is weak, at 2 out of 4.

• CPO prices have plunged on the back of the unwinding impact of Indonesia’s export ban, as well as fears of recession, which brought down commodity prices in general. We believe the price decline may have been slightly overdone, having fallen 44% in seven weeks – much more than the declines in soybean (-31%), crude oil (-17%) and wheat (-16%). While regulatory risks remain – particularly for Indonesian plantations – supply concerns will still haunt the sector for the rest of 2022, given the logistics backlog in Indonesia and labour shortages in Malaysia. That said, if these issues are resolved by end-2022, and if Ukraine is able to export its oilseed products as per the grains deal agreement signed, 2023 should still be a better year for supply, and prices would remain under pressure.

• ESG concerns, while still around, seem to have taken a backseat. However, the ESG discounts we had previously assigned to valuations are still prevalent. We have reassessed our ESG scores by relooking at the progress made by the industry, identifying shortcomings and any room for improvement. From our analysis, we highlight that while better disclosure on ESG-related information has been made over the years, progress in mitigating such issues is rather slow. As a result, we lift our ESG scores for some companies that have made progress, but note that some remain relatively stagnant in their ESG efforts, and others have even reduced disclosures.

• CPO price assumptions revised down. We still expect stock levels to remain tight for the next 2-3 months, possibly until end-3Q, thereby providing support to CPO prices. We cut our 2022F CPO price to MYR5,100/tonne (from MYR5,300/tonne). For 2023, as fundamentals continue to improve – assuming labour shortages are somewhat resolved and the Ukrainian oilseed output is able to be exported – CPO prices could decrease further. However, support from higher biodiesel mandates and discretionary biodiesel demand coming back will keep CPO prices above MYR3,000/tonne in the medium term. We cut our 2023F price to MYR3,900/tonne (from MYR4,300/tonne), but maintain our 2024F estimate at MYR3,500/tonne. As a result, we tweak CBIP’s FY22-24F earnings by -1 to 2%.

• Maintain NEUTRAL, with a lower TP of MYR1.30 (from MYR1.45). Our SOP valuation is now based on 8x FY23F P/E. Our TP has already taken into account an ESG discount of 20%, given RHB’s ESG score of 2.0. CBIP does not have many ESG disclosures, while not a lot of improvements have been made over the years, other than board members’ independence and female representation.

Source: RHB Research - 11 Aug 2022