News  CB Industrial Product Holding (CBIP) announced that it has been awarded a contract from PT. Jas Mulia (PTJM) to build a 60 MT/hour palm oil mill in Indonesia. We gather that the total value of the contract is USD12.9m or RM41.1m.

Comments  We are positive on the news as this would further strengthen CBIP’s order book. Assuming EBIT margin of 23% for this RM41.1m project, this should translate into RM8.7m to CBIP’s bottom line. Our assumptions of 23% margin are considered conservative as compared to its palm oil mill manufacturing (POMM) division margin of 25.7% in FY13.

Outlook  This latest contract should further boost CBIP’s total outstanding orderbook to ~RM520m. This means earnings visibility until 4Q15 for its POMM division.

Forecast  We maintain our core earnings forecast for both FY14E (RM96m) and FY15E (RM99m) as we had factored in the potential contract win of RM300m in FY14 in our previous assumption.

Rating Maintain OUTPERFORM

 We continue to like CBIP as it is poised to capture strong demand for palm oil mills in 2014 and also for steady margin improvement historically.

Valuation  Increase our Target Price to RM5.60 (from RM4.85). Note that we have increased the Target Fwd. PER to 15.0x (from 13.0x). This is to reflect the higher market cap of CBIP, which have exceeded RM1.2b which should attract the attention of larger institutional funds. Our 15.0x Target Fwd. PER is the maximum valuation that we are using as it is now at near 15% discount to average mid-cap plantation peers’ Target PE. The 15% discount is justified in our view as we estimate that it should take CBIP at least another 5 years before its plantation division becomes a major earnings contributor and hence only deserves the pure planter valuation by then.

Risks to Our Call Lower-than-expected contract win for its POMM division.

 Lower-than-expected margin for retrofitting special purpose vehicle (RSPV) division.

 Lower-than-expected CPO prices.

Source: Kenanga