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Monday, March 16, 2020

CB Industrial - Slower capex by planters

Investment Highlights

  • We met up with CB Industrial Product Holding (CBIP) recently. Based on Bloomberg consensus estimates, CBIP is currently trading at FY20F PE of 9.6x (EPS: 8.5 sen) and FY21F PE of 8.8x (EPS: 9.3 sen). CBIP’s gross DPS is estimated to be 3.7 sen in FY20F, which translates into a yield of 4.5%.
  • We understand that most plantation companies are slowing down their capital expenditure for palm oil mills. Due to the fall in CPO prices and economic uncertainties over Covid-19, most planters are delaying their spending on palm oil mills until absolutely necessary. Generally, a palm oil mill is required when mature areas reach between 7,000ha and 10,000ha.
  • CBIP is envisaged to secure RM200mil new mill contracts in FY20F vs. RM334mil in FY19. Almost all of the new contracts in FY20F are expected to come from Indonesia. Unbilled sales of the mill manufacturing division were RM429mil as at end-FY19. This is enough to sustain the group’s profitability for about a year and a half.
  • Pre-tax profit margin of the mill manufacturing division is expected to be 19% in FY20F vs. 19.9% in FY19. Low steel costs are envisaged to support CBIP’s PBT profit margin in FY20F. Steel is estimated to account for 36% of CBIP’s production cost while pumps and gear boxes make up another 24%. We understand that the selling price of a 45 tonnes per hour palm oil mill has been flat in the past one to two years.
  • We believe that CBIP’s plantation division in Central Kalimantan would remain in the red in FY20F. This is due to high production costs and low CPO prices and production. We estimate mature areas to be 4,000ha to 5,000ha in Indonesia. Planted areas are about 13,441ha. The plantation division recorded a pre-tax loss of RM18.5mil (excluding impairment of RM10mil) in FY19.
  • CBIP’s palm refinery in Johor commenced operations in January 2020. Earnings contribution from the palm refinery is not expected to be significant. To recap, CBIP has a palm refinery with a capacity of 250,000 tonnes per year in Klang and a palm refinery with a capacity of 134,000 tonnes per year in Johor.
  • CBIP also has two biodiesel plants in Klang with a total processing capacity of 350,000 tonnes per year and a biodiesel plant in Johor with a processing capacity of 120,000 tonnes per year.
  • We believe that global discretionary demand for biodiesel would be weak going forward due to low crude oil prices.
Source: AmInvest Research - 16 Mar 2020

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