CBIP’s potential new business model a source of recurring income
KUCHING: CB Industrial Product Holding Bhd’s (CBIP) potential new build-operate-transfer (BOT) business model is likely to be a source of recurring income for CBIP, specifically from its Palm Oil Milling Equipment (POME) segment.
Currently, CBIP’s POME order book continues to remain fairly robust, at slightly under RM500 million. The group have managed to secure projects worth approximately RM100 million during the third quarter of 2016 (3Q16), and maintains an immediate pipeline of projects, including the exploration and experimentation of the new proposed BOT business model.
During a recent meeting with CBIP investor relations Lim Zee Yang and the research arm of Kenanga Investment Bank Bhd (Kenanga research), Lim disclosed that via the new BOT business model, CBIP will be considering a concession arrangement whereby the company will build and operate the palm oil mill on behalf of their customers.
CBIP will receive payment for each ton of fresh fruit bunch (FFB) processed, while its customers are given an option to fully purchase the mill. This option will turn mandatory after a set number of years.
Should CBIP proceed with this new venture, Kenanga research has expressed their confidence in this model, citing, “we are positive on this model as we think it could be a win-win for planters with tight cash flow, while providing CBIP with recurring income from its POME segment alongside with its turnkey projects.”
Additionally, with crude palm oil (CPO) prices hitting multiyear highs of +44 per cent, yearto-date, the entire plantation industry is set to benefit on the whole in the near-term.
While CBIP also has its own plantation division, Kenanga research noted that contribution will be minimal from its 8,900 planted due to its young average age of approximately 3 years.
“Instead, CBIP expects to benefit from better Joint-Venture’s (JV) and associates contribution, which added up to RM5.5 in 3Q16, and should see similar contribution in 4Q16,” guided the research arm.
Meanwhile, CBIP’s Retrofitting Special Purpose Vehicles (RSPV) segment order book saw good recovery in 2016 from a low of RM35 million as of end-2015 to circa Rm500 million currently, mostly due to a new supply contracts for government vehicles.
With CBIP exploring further supply projects and entertaining the move of entering the maintenance business, Kenanga research has guided that they are expecting the RSPV segment to present good earnings performance in 4Q17, similar to the strong 3Q17 results. Looking towards the medium to long-term, Kenanga research increases their financial year 2017 estimates (FY17E) core net profit for CBIP by 5 per cent to RM81.6 – RM95.3 million. Additionally, they have also lowered their FY17E tax assumption to 22 per cent from 24 per cent as it is anticipated that tax rates will be lower in the next two years due to tax benefits.
“We maintain our other order book and earnings assumptions for now, pending more details on a possible BOT model for the POME segment,” added the research arm.
On the whole, the research arm maintains its ‘Market Perform’ outlook on CBIP with a higher target price of RM2.10, which is based on an unchanged forward price earnings ratio (PER) of 11.7 fold applied to higher FY17E earnings per share (EPS) of 17.9 sen post earnings adjustment.