AmWatch - CB Industrial Product : Supported by resilient demand for palm oil mills BUY, 4 Jun 2015

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CB Industrial Product : Supported by resilient demand for palm oil mills  BUY

We maintain BUY on CB Industrial Product Holding Bhd (CBIP) with an unchanged fair value of RM2.33/share. Our fair value is based on a fully-diluted FY16F PE of 13.7x. CBIP’s valuations are undemanding. The group is currently trading at fully-diluted FY15F PE of 14.1x and FY16F PE of 11.9x. In the past seven years, the group’s PE ranged from a low of 2.9x to a high of 13.7x. Average PE was 8.4x.

We have reduced CBIP’s FY15F EPS by 8.1% to account for the expiry of Modipalm Engineering’s pioneer tax status in March 2015. Although CBIP is likely to receive pioneer tax status in respect of its zero effluent palm oil mill, this would only come in four to six weeks’ time. In addition, there is a possibility that the new pioneer tax status may not recover the loss of savings from the previous pioneer tax status completely. CBIP is expected to win a record level of new palm oil mill contracts in FY15F. CBIP is forecast to win about RM400mil to RM500mil new contracts in FY15F compared with RM270mil in FY14. The new contracts coupled with unbilled sales of RM480mil as at end-March 2015 are expected to sustain the group’s profit growth in FY16F.

A significant portion of the contracts are expected to come from countries such as Liberia while the balance is anticipated to come mainly from plantation companies in Indonesia and Papua New Guinea. We estimate CBIP had received more than RM200mil contracts year-to-date. It appears that CBIP is still able to secure mill contracts in spite of weak CPO prices. Depending on a plantation company’s requirement, a palm oil mill may be required for mature areas as small as 5,000ha or as large as 10,000ha. Capex is forecast at RM50mil in FY15F. These are mainly in respect of new plantings of oil palm in Kalimantan. New plantings are targeted between 3,000ha and 4,000ha in FY15F versus 1,500ha in FY14.

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