CB Industrial Product Holding Bhd
(Aug 19, RM1.72)
Maintain outperform with a lower target price (TP) of RM2.13: CB Industrial Product Holding’s (CBIP) core net profit of RM37.3 million for the first half of financial year 2015 (1HFY15) made up 44% of both consensus (RM83.8 million) and our forecasts (RM84.4 million). We deem this as broadly within expectations as historically, 1H on average contributed 43% of full-year earnings for the last five years.

No dividend was announced, as expected. Year-on-year, 1HFY15 core net profit declined 17% mainly on a higher effective tax rate (17% versus 7%) as CBIP’s pioneer tax status ended in the first quarter (1QFY15). Otherwise, profit before tax (PBT) was flat at RM48.7 million as stronger palm oil mill equipment (Pome) segment’s PBT (+11% to RM51.4 million) was offset by poor retrofitting special purpose vehicle (RSPV) segment’s PBT (-58% to RM1.7 million) due to lower project billing.

Quarter-on-quarter, 2QFY15 core net profit fell 18% to RM16.8 million due to higher tax as mentioned, but PBT improved 4% to RM24.8 million on higher Pome segment’s PBT (+6% to RM26.5 million), exceeding the drop in the RSPV segment’s PBT (-92% to RM100,000).

Near-term outlook is “neutral” as we expect CBIP’s solid Pome segment’s growth to be limited by volatile RSPV earnings. However, we are optimistic about CBIP’s mid-term outlook due to the strong pace of order book replenishment at more than RM250 million year to date, or 56% of our FY15E (estimate) order book replenishment of RM450 million. This will provide good earnings visibility up to late-2016.

FY15 to FY16E earnings are lowered 5% to RM80.3 million and RM112.8 million as we cut our RSPV segment’s revenue forecast to RM244.2 million to RM256.5 million (-24%), reflecting softer year-to-date RSPV order book.

We believe CBIP holds better upside prospects than many plantation companies due to its order book-based earnings. We also like CBIP for its strong balance sheet with net cash of RM155.9 million or 29.4 sen per share.

We lower our TP to RM2.13 (from RM2.49) based on a lower forward price-earnings ratio (PER) of 11.7 times (from 13 times) on lower average FY15 to FY16E earnings per share of 18.2 sen (from 19 sen). Our target forward PER is reduced to 11.7 times as we lower our valuation basis to a +0.5 standard deviation (SD) (from +1SD) to reflect unstable RSPV segment’s earnings. Overall, we remain “positive” on CBIP as the Pome segment makes up almost 90% of group earnings. We note that the Pome segment’s order book status remains robust, with earnings that are less volatile compared to the plantation sector. — Kenanga Research, Aug 19

This article first appeared in digitaledge Daily, on August 20, 2015.