CB Industrial Product Holding Bhd
(Feb 20, RM2.19)
Maintain market perform with a higher target price (TP) of RM2.15: CB Industrial Product Holding Bhd (CBIP) announced that it has received a letter of acceptance (LoA) from PT Lifere Agro Kapuas (LAK), a subsidiary of United Malacca Bhd to build a new 45/90 tonnes per hour palm oil mill in Kalimantan, Indonesia, for LAK. We gather that the value of the contract is separated into an imported portion at RM17.2 million and a local portion at 149.2 billion rupiah (RM49.8 million). The total value of the contract is RM67 million.

We are positive on the announcement as the first major order-book win announced for the year. We expect this to bring its outstanding palm oil milling equipment (POME) order book to above RM550 million, which provides earnings visibility over the next two years.

The project value makes up around 12% of our estimated FY17 (FY17E) order book replenishment assumption of RM550 million. Assuming an earnings before interest and tax margin of 21% for the RM67 million project, this translates into a bottom-line contribution of RM14.1 million. Our assumption is in line with its nine months of FY16 (9MFY16) POME margin of 21%.

As discussed in our previous company update report published Dec 16, 2016, we believe CBIP could see some positive developments in 2017 with potential recurring income streams from a build-operate-transfer model for its POME segment and maintenance contracts in the retrofitting special purpose vehicles segment. Plantation earnings should also do well in the first half of FY17 thanks to very supportive crude palm oil prices. However, steel price volatility continues to pose a short-term risk to margins.

We maintain FY16 to FY17E core net profit of RM81.1 million to RM95.3 million as the award falls within our order-book replenishment assumptions.

Price-to-earnings ratio (PER) of 12 times applied to FY17 earnings per share of 17.9 sen. Our target PER is updated to 12 times with an unchanged three-year +0.5SD valuation basis, which reflects stable POME order-book position giving good long-term earnings visibility.

We would consider upgrading our call or TP once further news on recurring income streams is confirmed. With an overall neutral outlook on existing businesses but potential upgrade catalyst in the mid-term, we reiterate our “market perform” call for now. — Kenanga Research, Feb 20