RHB Research maintains outperform on CBIP

CB Industrial Product Holdings Bhd (CBIP)
(July 7, RM2.59)
Maintain outperform at RM2.60 with fair value of RM3.70: CBIP has obtained four contracts from Wilmar to construct and supply four modipalm mills in Indonesia for a total of RM53.93 million. These contracts are for the supply of the machinery only and do not include the installation and commissioning of the mills.

The four mills have a total capacity of 135 tonnes per hour (t/hr). Three will have a 30t/hr capacity and one 45t/hr, which makes the cost translate to about RM400,000 per tonne capacity.

This is much lower than the average RM700,000 to RM900,00 per tonne capacity that CBIP normally charges, due mainly to the exclusion of the installation and commissioning costs. We are positive on this model of operation as it will solve CBIP’s management and skilled technician shortage problem. It could give CBIP better margins, as 50% of the contract amount is paid up front and the rest upon delivery, as opposed to other projects which are billed progressively.

This would also help save some interest costs, as CBIP would be able to use the upfront payment to purchase the raw materials for the mills without having to use its own funding first.

This contract would bring the total contracts CBIP has obtained year to date 2010 to an estimated RM82.6 million. We understand CBIP’s unbilled order book now stands at about RM350 million, which should last the company approximately 18 months. As we have already forecast CBIP to record revenue of RM250 million to RM300 million from its oil mill engineering division in FY2010/11, this new contract will not have any impact on our earnings projections.

The main risks include: (i) a significant decline in oil mill engineering contracts due to slower-than-expected economic recovery and plantation investment in Indonesia as well as Malaysia; (ii) a stronger-than-expected rise in steel prices and weakening of the US dollar, resulting in weaker-than-expected margins for the oil mill engineering division; (iii) a fall in CPO and other global vegetable oil prices caused by weather abnormalities; and (iv) a reversal in crude oil prices and thus CPO prices.

No change to our forecasts. Our sum-of-parts-based target price is unchanged at RM3.70 and we maintain our outperform recommendation on CBIP. Note our fair value reflects the dilution from the 10% proposed private placement, which has not been completed yet. — RHB Research Institute, July 7


This article appeared in The Edge Financial Daily, July 8, 2010.