A palm oil mill specialist, CB Industrial Product Holdings Bhd (CBIP)’s fundamentals are underpinned by high profits from its palm oil equipment projects and its growing orderbook in modipalm mills especially in Indonesia. Despite losing revenue contribution from its plantation segment, 1HFY12 results were commendable. Stripping off the gains from its discontinued plantation operations in Sarawak, the company’s 1H net income remained strong with a healthy growth of 68% at RM45.4m, boosted by thriving mill construction sector and improved margins. We are initiating coverage on CBIP with a fair value of RM3.28, pegged at a five-year average PER of 9.4x on its FY13 earnings.
A modipalm specialist. CBIP has collaborated with the Malaysia Palm Oil Board to jointly develop a non-pressurised continuous sterilisation (CS) technology for palm oil mills. The company earned a patent for the “Continuous Extraction of Palm Oil and Palm Kernel” process in 2006, giving it an exclusive right to build Modipalm mills with the CS technology until 2021. In addition, the company’s pioneer status for 10 years allows it to enjoy tax incentives till 2015.
More jobs in hand. CBIP is getting more jobs, particularly contracts for boiler and modipalm. As of end-1QFY12, the company has secured RM787.3m worth of contracts and total unbilled sales of RM355.8m. It targets to secure RM500m worth of contracts to sustain its growth, with greater demand expected from Indonesia, some mill conversion in Malaysia, as well as new markets in Papua New Guinea.
Capitalising on Indonesia’s booming plantation sector. Indonesian palm oil plantation industry has grown rapidly with increasing economic significance. With the country’s total area for palm oil now stands at close to eight million hectares, the Indonesian government projected the CPO output to increase from 22.5m MT in 2011 to 23.6m MT this year as more trees reach maturity. The company is set to benefit from the strong growth in Indonesian oil palm plantation sector which has a considerably young palm profile.
Higher contribution from SPV segment. As of end-June 2012, CBIP’s retrofitting special purpose vehicle (SPV) division contributed about RM107.2m, or 42% of its total sales. To date, the company’s SPV division has secured an orderbook totalling about RM470m and unbilled values of RM310m as of 30 June 2012.
Buy. We are initiating coverage on CBIP with a fair value of RM3.28, pegged at a five-year average PER of 9.4x on its FY13 earnings. After the disposal of its Sarawak plantation operations, its core growth will be driven by mill construction and retrofitting special purpose vehicle segments. We expect its core businesses to continue to do well, underpinned by its growing orderbook, improved margins and potential new customers from Indonesia and Papua New Guinea. The company plans to keep its dividend distribution at one-third of its net profit. We are projecting a total dividend of 13 sen per share, which translates into a dividend yield of 4.6%. We do not discount the possibility of a higher dividend payout as the company is cash-rich after the disposal of its Sarawak plantation operations. We propose a fair value of RM3.28 on CBIP, pegged at a five-year average PER of 9.4x on its FY13 earnings. BUY.
Background
A palm oil mill specialist. CBIP is involved in the design, manufacture, procurement, supply, construction and commissioning of palm oil mills. With more than 30 years of experience in the industry, the company is now a full-fledged turnkey contractor for palm oil mills. It has the capacity to build about 14 mills per year. In addition, the company is engaged in palm oil plantation and retrofitting special purpose vehicles such as ambulances and fire engines.
Investment Case
Modipalm patent. CBIP has collaborated with the Malaysia Palm Oil Board to jointly develop a non-pressurised continuous sterilisation (CS) technology for palm oil mill. Its wholly-owned subsidiary, Modipalm Engineering Sdn Bhd, was granted a patent for the “Continuous Extraction of Palm Oil and Palm Kernel” process in 2006, giving CBIP the exclusive right to build Modipalm mills with the CS technology until 2021. It was also granted a pioneer status for 10 years to enjoy tax incentives through 2015.
In Figure 1, conventional sterilisers load fresh fruit bunches (FFBs) into cages, which are then placed into horizontal cylindrical autoclaves for sterilisation. During the CS process, FFBs are sterilised in automated conveyors under atmospheric steam (Figure 2). The Modipalm CS technology improves efficiency by reducing energy consumption and greenhouse gas emissions, thereby reduces labour and maintenance costs while improves mill cleanliness and safety.
More jobs in hand. CBIP is getting more jobs, particularly contracts for boiler and modipalm. As of end-1HFY12, the company has secured contracts worth RM787.3m and total unbilled sales of RM355.8m, which together are equivalent to 1.1x of its FY11 revenue. These contracts would keep the company busy until 2H2013. Going forward, it aims to secure RM500m worth of contracts to sustain its growth, with greater demand expected from Indonesia, some mill conversion in Malaysia, as well as new markets in Papua New Guinea.
Recurring income from mill upgrading works. The replacement of parts and upgrading works of palm oil mills have been generating recurring income for CBIP. Revenue from this segment is expected to make up about 5%-6% of the company’s total in FY12. Going forward, we believe that more aging mills will need further replacement and upgrading works, especially in Malaysia.
Higher contribution from SPV segment. As of end-June 2012, the company’s retrofitting special purpose vehicle (SPV) division contributed about RM107.2m, or 42% of its total sales. It managed to secure two government contracts last year, including supplying 100 units of fire rescue transport with fitting and accessories to the Ministry of Housing and Local Government Malaysia, as well as 100 units of ambulance inclusive medical equipment to the Ministry of Health of Malaysia. Both contracts have a combined value of RM66.5m. To date, the company’s special purpose vehicle (SPV) division has secured an orderbook totalling about RM470m and unbilled values of RM310m as of 30 June 2012.
Exit Malaysian plantation operations to focus on Indonesia. CBIP entered into palm oil plantation in 2004 by acquiring 14,500 ha of land in Sarawak. Lacking success in getting more lands in its Malaysian plantation operations, it exited the Malaysian business to raise fund for its expansion in Indonesia.
In May 2012, the company sold its Sarawak plantation operations (9,656 ha of plantation land with an average 18 – 19 years old oil palm) for RM268.1m. At about the same time, it acquired two subsidiaries – PT Jaya Jadi Utama (PT JJU) and PT Berkala Maju Bersama (PT BMB) in Indonesia which own over 29,000 ha of plantation land in Kalimantan. In late August, CBIP proposed to acquire a 94% stake in PT Gumas Alam Subur (PT GAS) for RM6.3m. Figure 5 shows the location of its plantation landbank in Kalimantan, including the two newly acquired subsidiaries – PT BMB and PT JJU. Upon completion of its acquisition, the company will own over 51,000 ha of plantation land.
New planting schedule in 2012 will be relatively slow at about 1,000 ha per annum before progressing faster at about 5,000 – 6,000 ha per annum. With an estimated plantation development cost of about RM16,000 per ha, CBIP would need to fork out about RM80m a year for each new planting of 5,000 ha. Its disposal gain of close to RM140m is sufficient to fund its Indonesian plantation development expenditure for two to three years. The management is estimating an annual capital expenditure of RM25m for FY12, most of it will be spent on its plantation operation. We are expecting minimal contribution from its plantation segment until after its trees reach maturity in 2015.
Industry Prospect
Capitalising on expanding Indonesia’s oil palm sector. The third largest palm oil exporter, Indonesian palm oil plantation industry has grown rapidly over the decades with increasing economic significance. In 2007, Indonesia overtook Malaysia as the world’s largest palm oil producer. The upstream activity, which covers the plantations and CPO production, continues to take the lead in the growing oil palm industry. As shown in Figure 6, oil palm plantations are largely concentrated in Sumatra Island (Riau is part of Sumatra Island). Over time, Kalimantan has become an alternative plantation site with its large potential landbank.
Benefit from lower raw material prices. About 60% of the total cost of palm oil mill construction comes from raw materials, with cold rolled coil as the main ingredient. Prices of cold rolled coil have been declining in recent years. According to Bloomberg, the price of cold rolled coil declined from USD832.75/tonne in 1HCY11 to USD733.17/tonne in 1HCY12, after hitting a record high of over USD1,200/tonne in 2008. Hence, we do not foresee a spike in cold rolled coil prices in the near term.
1HFY12 Results Review
Commendable 1HFY12 results. CBIP’s 1HFY12 results were commendable, with 1H revenue soaring 96% to RM264.9m. A much higher 1H net income of RM188.0m (+310% y-o-y) was primarily due to a one-off gain from the RM139.6m disposal of its Sarawak palm oil operations. Stripping off the gains from its discontinued plantation operations in Sarawak, the company’s 1H net income still chalked up a healthy growth of 68% at RM45.4m. The strong improvement was due to higher sales recognitions from both palm oil equipment and special vehicles segments. Its palm oil equipment segment’s revenue, which stood at RM254.2m in 1HFY12, was up 29% y-o-y. PBT of the segment jumped 117% to RM38.5m. The special vehicles segment also achieved better results, with a PBT of RM8.7m against a loss of RM0.7m in 1HFY11. Although we see little significant contribution from the company’s palm oil plantation segment in the coming three years, we expect the palm oil equipment and special vehicles segments to continue to do well with sustainable growth, underpinned by its strong orderbook and improved margins.
Valuation & Recommendation
Buy with FV of RM3.28. After its disposal of Sarawak oil palm plantation operations, there will be minimal contribution from its plantation segment until 2015. Being one of the major players in palm oil mill construction business, we expect its core business to continue to do well, underpinned by its growing orderbook, potential new customers from Indonesia and Papua New Guinea, as well as long-standing relationship with its long-term customers such as Felda, Tradewinds Plantations and other private plantation owners. The company plans to keep its dividend distribution at one-third of its net profit. We are projecting a total dividend of 13 sen per share, which translates into a dividend yield of 4.6%. We do not discount the possibility of a higher dividend payout as the company is cash-rich after the disposal of its Sarawak plantation operations. We are initiating coverage on CBIP with a fair value of RM3.28, pegged at a five-year average PER of 9.4x on its FY13 earnings. BUY.
Source: OSK
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