30 JEWELS 2013 Edition
CB Industrial Product Holding
Robust Contract Flows
•Proxy to the plantation sector, but shielded from CPO price volatilities. Even in low CPO price periods, ongoing capex spending by plantation companies, in preparation for the upcoming maturity of their estates, will drive CBIP’s short-term earnings growth.
•The Group’s new zero discharge mill and the recently proposed acquisition of the Vickers Hoskins boiler factory will help to expand its market reach even further and ensure medium-term growth.
•Trading at undemanding valuations of 9-9.5x P/E for FY13FFY14F, at a significant discount to the plantation sector’s 17x-19x.
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. CBIP has Tax Pioneer status for its modipalm mill operations, which expires in 2015. It is currently awaiting patent approval for its new Zero Discharge Modipalm Oil Mill technology which, if obtained, will result in the Company being granted a new Tax Pioneer status, thus extending its tax-free status for another 10 years past 2015.
Growing orderbook. CBIP’s unbilled orderbook for its oil mill engineering division has been growing and stood at MYR389.5m at end-March (vs MYR329m at end-Dec 2012). Contracts secured in 1HFY13 alone, amounting to MYR300m, have already surpassed the whole of FY12’s MYR280m. Additionally, management expects to be able to secure additional MYR150m-MYR200m worth of jobs in 2HFY13, based on its ongoing negotiations.
In 2HFY12, CBIP expanded its modipalm factory capacity and now has the capacity to produce about 16-18 palm oil mills per year. This is a significant improvement from its previous capacity of 10-12 palm oil mills a year. With this expanded capacity, CBIP should not have any problem meeting the robust demand for its products, which it continues to see.
Strong potential to further grow market share. CBIP’s potential to grow its market share is enormous, as mature oil palm acreage in Indonesia is projected to increase by 400,000 ha this year alone, which will need to be serviced by some additional 40-50 mills. In addition, based on the existing matured oil palm area of 14.2m ha, there are an estimated 1,400 palm oil mills in existence, which will need replacing every 20 years. As such, CBIP should have no problem in expanding its global oil mill manufacturing market share from the estimated 15%-20% currently.
Other subdivisions have promising prospects. CBIP’s recent proposal to acquire boiler competitor, Vickers Hoskins (M) SB’s (VHSB) factories and land (10 acres) in Kapar, Selangor, for MYR36m will enable the Company to manufacture 60 boilers per year (from 20 previously), This will enable CBIP to not only produce boilers for its existing modipalm mill customers, but also expand its market reach to other industries that require boilers, such as the power and oil and gas (O&G) industries. We have not yet imputed any additional revenues from this acquisition into our forecasts, given the uncertainty over the length of the transition period required. However, as an indication, we understand that the boiler division recorded a net profit (ex-EI) of MYR5m-MYR6m in FY12. Assuming that this profit was obtained from manufacturing 20 boilers, a tripling of capacity to 60 boilers a year could mean profits of MYR15m-MYR18m a year from the Company’s boiler operations. This could potentially add an additional 11%-14% per annum to its net profit. Besides boilers, CBIP’s special purpose vehicle sub-division is also growing, with orderbook at MYR301m at beginning of July (up from MYR100m at end-FY12).
Company Report Card
Latest results. CBIP’s 1QFY13 core net profit was in line with our and consensus FY13 estimates. It accounted for 20%-22% of FY13 forecast, which we consider this to be in line as 1Q is typically the weakest quarter for CBIP, given the timing of its progress bills to its customers. We expect stronger profits to come in 3Q and 4Q.
Balance sheet / Cashflow. As at end-1QFY13, CBIP had net cash of MYR66.8m. We expect it to remain in the net cash position for the next few years.
ROE. We expect ROE to remain stable at 15%-20% over the next few years.
Management. Led by co-founder and managing director Mr Lim Chai Beng. He had been the driving force behind CBIP’s growth and is responsible for the Company’s overall management, strategic plans and policies. He also has vast experience in the engineering industry.
Dividend. CBIP’s dividend policy is to pay out at least 30% of its net profit annually. Based on this assumption, annual net dividend yield should be at a decent 3%-4%.
Our forecasts are fairly conservative as we have only projected CBIP to grow its oil mill engineering revenue by 5%-10% per year, vs management’s target of 10%-20%, from FY14 onwards. Even at conservative assumptions, valuations are undemanding at 9-9.5x P/E for FY13F-FY14F. As such, we reiterate our BUY recommendation on the stock with a SOP-based TP of MYR3.50. Our SOP valuation is based on an 11x CY14 P/E for its oil mill engineering division and an 8x CY14 P/E for its plantation division.