KUALA LUMPUR: RHB Research Institute is retaining its Buy call on CB Industrial Product Holding
(CBIP) for its 12% three-year earnings compounded annual growth rate (CAGR) and 5%-6% prospective net dividend yield.
It said on Tuesday it fine-tuned its target price to RM2.00 (from RM2.20, 20% upside) post earnings revisions.
RHB Research said CBIP is confident of last year’s backlog of oil mill contracts coming through in 2018, and targets doubling up its new oil mill orderbook this year.
In addition, the benefit from its pioneer tax status (70% tax rebate for its oil mill engineering revenue) should be more significant from end-FY18.
“These positives should help more than offset the impact of the weakening US dollar and higher steel prices,” it said.
RHB Research said Iin 2018, CBIP targets achieving new contract flow of RM450mil to RM550m (double that of 2017’s estimated RM250mil).
As at 9M17, its orderbook stood at RM424mil (1H17: RM436mil). We assume more conservative oil mill orders of RM350mil to RM400mil for FY18-19.
On the margin front, CBIP would be negatively affected by the depreciation of US dollar, given that about 50%-60% of its revenue is in that currency, while costs are mostly in ringgit.
“We estimate every 10 sen change in the USD/ringgit rate would affect its net profit by 1%-2% per annum.
“Steel prices have also been on the rise (+10% year-to-date), which is also negative for the company. However, as it locks in steel costs upon clinching and pricing a project, any rise in steel prices would mostly be passed through to its customers.
“CBIP is tendering for a few large projects for its retrofitting division, which would last it for the next two to three years. Orderbook was at RM254mil as at end-September 2017, with management hoping to secure an additional RM500mil worth of contracts in 2018 involving fire trucks, helicopters and other vehicles.
“We reduce FY17F-18F earnings by 2-10% to take into account our revised in-house USD/ringgit assumptions, as well as higher steel prices. However, we raise FY19F earnings by 14%, to allow for the pioneer tax status impact,” it said.
RHB Research said while CBIP’s zero discharge plant is still undergoing testing and may not be commercialised yet, CBIP is able to benefit from the pioneer tax status already.
Recall that CBIP’s five-year pioneer tax status took effect in November 2017 and would last five years, giving the company a 70% discount on taxes for its oil mill engineering business.
However, it would not be able to benefit fully from this tax incentive until FY19, as there would be a need to complete the existing contracts (that are being built currently) first.
“We have adjusted our tax rate assumptions for FY19-20 accordingly,” it said.
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