CB Industrial Product -
Targeting The World As Its Market
We are initiating coverage on CB Industrial Product Holding ("CBIP") with an OUTPERFORM rating and TP of RM3.18 (implying a potential total return of 18.2%). CBIP is the biggest and the only listed palm oil mill construction company in the world with sizeable market cap of RM740m.
We like CBIP due to: (i) it is poised to capture strong demand for palm oil mills in 2014, (ii) steady margin improvement as its MCSP technology gained global recognition, (iii) superior margin against other Malaysia specialized contractors, (iv) decent dividend of 4.2% and (v) strong balance sheet with net cash of RM128m. We estimate FY13E-FY14E net profit of RM86.1m (+1% YoY) – RM94.9m (+10% YoY). In our view, the stock is ripe for a PER re-rating upwards due to its superior margin and decent dividend yield. It is also a good diversification play in the current low CPO prices' environment while maintaining proxy to the plantation sector.
Poised to capture strong demand for palm oil mills in 2014. Globally, new maturing palm oil plantation area is estimated at 610,000 ha according to Oil World forecast. As plantation companies will usually build palm oil mill when its estate reached maturity, we expect that there is a global demand for an additional 55-60 palm oil mills (assuming the capacity of 60mt/hour each). CBIP is well positioned to benefit from this global trend as it is the biggest and the only listed palm oil mill construction company in the world. Assuming a conservative 15% market share, we expect CBIP order book to be boosted by at least 20% to RM500m by end-2014. As it is, the Company current order book of RM421m is already enough to last for another 1.5 years until FY14.
Steady margin improvement as its Modipalm Continuous Sterilization Process TM (“MCSP”) technology gain global recognition. CBIP Palm Oil Mill Manufacturing (“POMM”) division EBIT margin has improved steadily in the past five years from 13% in FY08 to 23% in FY12. We reckon this is caused by the increasing brand awareness and the proven mill construction technology of its Modipalm Continuous Sterilization Process TM (“MCSP”) which was patented in 2006. Note that mills built using MCSP technology are generally more cost efficient, safer and more reliable.
Superior margin against other Malaysia contractors. Note that CBIP POMM division EBIT margin at 23.3% is higher than major specialized construction companies in Malaysia which registered average EBIT margin of 19.2%. We reckon that the excellent margin achieved is caused by its specialization in building palm oil mills with patented MCSP technology.
Decent dividend yield of 4.2%. We expect generous FY13E-FY14E net dividend payouts of 10.6-11.7 sen, representing net dividend yields of 3.8%-4.2%. This is higher than all other plantation companies under our coverage which ranges from 1.2% to 3.2%. CBIP dividend yield is also superior against other construction companies dividend yield which range from 1.4% to 3.9%. We have assumed a payout ratio of 33%, which is at the lower end of the Group’s 5-year historical payout range of 23%-79%.
Strong balance sheet. CBIP is in net cash position of RM128m or RM0.71 per share as of end-Jun 2013. This will provide flexibility to the management to continue developing its Kalimantan estate without affecting its dividend payment in the near term.