CBIP a defensive plantation counter
KUCHING: CB Industrial Product Holding Bhd’s (CBIP) strengthening order-book outlook, renewal of its pioneer status and consolidation in its plantation division provide a strong value proposition as a defensive plantation counter.
According to the research arm of Kenanga Investment Bank Bhd ( Kenanga Research), as of end-2107, CBIP recorded an outstanding order-book of RM426 million and with a new January 2018 contract valued at RM61 million.
It also noted that CBIP’s latest outstanding order-book is slightly under RM500 million, with sufficient earnings visibility for 1.5 years.
“We expect contract flows to pick up in 2018 over 2017 as production recovery gets underway, leading to stronger demand for mill upgrades,” it said in a report yesterday.
Meanwhile, the research team noted that CBIP’s growth areas include Kalimantan and South America where high maturing acreage would necessitate new mill construction.
“We gather that the company continues to explore the recurring income model, which should be attractive to smaller planters that could have limited cash flow compared to larger planters,” it added.
Aside from that, Kenanga Research noted that CBIP has earned pioneer status which allows for partial tax exemption since November 2017, and this is valid for five years with possible extension.
“Although we maintain our financial year 2018 estimated ( FY18E) tax assumption at 22 per cent, we expect new projects acquired this year to be entitled to pioneer tax exemptions, and thus reducing our FY19E tax assumption to 18 per cent, which increases FY19E core net profit (CNP) by five per cent to RM96 million.
“We would expect tax rates to see meaningful declines from the second half of 2018 (2H18) onwards,” it explained.
As for CBIP’s plantations performance in FY17, Kenanga Research noted that while its plantations saw narrowed losses in FY17, its overall business remains profitable, with the inclusion of associate earnings.
“Nevertheless, management noted that it is exploring consolidation of its assets and we observe that its ample cash pile of RM150 million could support further acquisitions,” it added.
It estimated that at a maximum net gearing of 50 per cent, the company could support an acquisition worth up to circa RM450 million, or circa 15,000 hectares ( ha) of Indonesian brownfield area assuming a price tag of RM30,000 per ha.
On CBIP’s valuations, Kenanga Research pointed out that CBIP is currently trading at multi-year low valuations, with a forward price earnings ratio (FWD PER) of only 9.2-folds, compared to its three-year historical average of 11.4-folds.
“This is the lowest valuation since August 2015, implying close to minus two standard deviation (SD) valuation from the market. We believe this is unjustified given its earnings recovery, renewed pioneer status and progress in its fledgling plantation division.”