OVER the past month, the usually low-profile CB Industrial Product Holding Bhd has been in the news, having announced three back-to-back contract wins.
For the year-to-date period, the manufacturing and engineering-based company has secured over RM300mil in the form of five new contracts.
After what it described as an “exceedingly challenging” year in 2018, the contract wins could indicate a better a year ahead for the group – at least for its Palm Oil Equipment and Engineering (POE) segment.
The new contracts, secured by its unit, PalmitEco Engineering Sdn Bhd, brings the group’s outstanding order book for the segment to about RM504mil.
Observers say the new jobs are likely to keep the group busy for the year, even in the event that no other major contracts are secured this year.
As for its other business segments, however, things have not been quite as rosy.
Apart from its POE segment, CBIP is also in the business of retrofitting special purpose vehicles (SPV), in which it supplies various types of specialised vehicles including, among others, medium and heavy-duty trucks, fire-fighting vehicles and ambulances. Its 51%-owned SPV segment’s customer base includes government agencies such as the Urban Wellbeing, Housing and Local Government Ministry, Health Ministry, and National Security Council.
Currently, the segment’s market is only in Malaysia.
The concern about this segment is that all of its existing major contracts came to an end last year, which puts it at risk of incurring losses.
In FY18, the segment brought in a revenue of RM120.7mil, and profit before tax of RM43.9mil, which represented a year-on-year decrease of 631.8%, and an increase of 22.6% respectively.
The higher profitability was due to higher project billings and lower project costs, as its contracts neared completion.
“Although all the contracts have been completed, this segment aims to continue to pursue opportunities not only in Malaysia but also with a plan to expand its business in overseas market,” the group says in its annual report.
It plans to do this through the “active marketing of new products across new geographical markets”.
A report by Alliance DBS Research, meanwhile, is optimistic, saying it does not expect the division to incur losses due to its stringent cost discipline, even if it is unable to secure sizeable contracts going forward.
It notes that while the segment hasn’t managed to secure big contracts, it has won several periodic maintenance works and small-scale replacements and replenishments for specialised vehicles such as fire trucks and ambulances.
“Furthermore, management has engaged in operational streamlining and cost optimisation exercises since last year to mitigate earnings downside risks from this division,” it says.
The year 2018 was tough for CBIP.
The group, which specialises in the construction of palm oil mills, manufacturing of palm oil mill equipment, machinery and related parts, saw its revenue slide by 32.1%, and profit before tax shrink 10% to RM88.5mil.
The main reason for the decline was the SPV segment, owing to the fact that the bulk of its contracts ended towards the second half of the year.
The POE segment, meanwhile, saw a drop in revenue during the period, although profit before tax rose on recovered bad debts and gains on the disposal of property.
While things currently look good for this segment, due to the contract wins, it must be noted that CPO prices indirectly play a part in determining how well the segment does.
In the event of prolonged weakness in CPO prices, it is common for palm oil players to decide to hold back on their spending, which means less business for companies like CBIP.
And the possibility of this happening cannot be dismissed, given that the world’s two biggest palm oil producers, Malaysia and Indonesia continue to grapple with rising inventory levels, which has resulted in lacklustre CPO prices in recent times.
Also, a prolonged price weakness could also impact another segment of the group – CBIP’s own plantation business.
CBIP’s palm oil plantation and milling segment consists of a 32,000 ha land bank, of which 12,700 ha have been planted.
The segment posted a loss of RM8.8mil in FY18, following a loss of RM9.2mil in the previous year.
The reason the segment continues to incur losses is that the age profile of the palm trees is relatively young, thereby bringing in low revenue. However, the group says the losses are narrowing in line with the maturing oil palm trees.“While set-up and operating costs will continue to be incurred by this segment until the maturity of the oil palm trees, our first palm oil mill which has commenced operation in early 2019 should be able to improve profitability in the coming years,” the group says in its annual report.
While CBIP appears to have clinched enough contracts in the first four months, in order to sail through the rest of the year, analysts say there may be a few more contracts wins in the pipeline.
Kenanga Research, for one, expects CBIP to secure one or two more contracts by year-end, which it says will compensate for its exhausted SPV order book, and subdued plantation business.Also, taking an optimistic view, the SPV segment, which does not have any significant contracts, is not expected to incur losses – if any – due to efficient cost management, while losses from the plantation segment are narrowing as the trees mature.
Overall, it looks as though 2019 has the makings of a much better year for CBIP.
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