CB Industrial Product - Indirect exposure to CPO prices

- Maintain HOLD on CB Industrial Product Holding Bhd (CBIP), with an unchanged fair value of RM2.85/share, which is based on FY13F PE of 12.5x. In the past seven years, CBIP’s PE band ranged from a low of 4x to a high of 21x. Average PE was 10x.

- CBIP held an analyst briefing yesterday. The group’s mill construction division is expected to secure more contracts from new customers this year.

- Demand for new mills is envisaged to be underpinned by expansion in the mature areas of plantation companies. We estimate that a palm oil mill is needed for every 10,000ha of mature area.  

- CBIP is bidding for RM700mil worth of contracts in FY12F. Assuming a 50% success rate, the group would be securing RM350mil worth of contracts in FY12F (FY11: RM313.2mil). 

- EBIT margin of the mill construction division is expected to be resilient on the back of soft steel prices and higher proportion of M&E (mechanical and engineering) works. In 1QFY12, the division recorded a pre-tax profit margin of 23%.   

- Out of the unbilled sales of RM356mil as at end-March 2012, about 42% or RM150mil are in respect of M&E works. The unbilled sales of RM356mil are about 1.1x of the mill construction division’s turnover in FY11.

- CBIP would be planting on 5,000ha to 8,000ha of land in Kalimantan in FY13F. Capex is expected to range between RM50mil and RM70mil for the plantation division in FY13F. Currently, the group is preparing nurseries in its oil palm estates in Kalimantan. 

- CBIP is also planning to acquire more landbank in Indonesia. Presently, CBIP has 37,273ha of land in Kalimantan. Out of the 37,273ha, about 33,000ha or 89% is plantable.

- In spite of an increase in capex resulting from CBIP’s expansion into plantation, we understand that the group would not be carrying out any cash calls yet. 

- In terms of dividends, CBIP would try to return one-third of its net profit to shareholders every year. For FY13F, we are forecasting a gross DPS of 8 sen, which implies a payout of 35% and yield of 3%.

Source: AmeSecurities