PP 7767/09/2010(025354)

12 August 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note 12 August 2010

MARKET DATELINE

Share Price : RM3.30

CB Industrial Product Fair Value
Recom
:
:
RM4.05
Outperform
Picking Up The Pace (Maintained)

Table 1 : Investment Statistics (CBIP; Code: 7076) Bloomberg: CBP MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/CF P/NTA ROE Gearing GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 331.5 40.4 29.4 (33.6) 11.2 - 8.5 2.0 17.1 47.1 3.0
2010f 584.4 59.7 43.4 47.4 7.6 46.0 6.6 1.6 21.7 34.5 4.2
2011f 675.5 72.6 52.7 21.6 6.3 51.0 5.5 1.3 22.1 34.8 5.2
2012f 698.0 75.8 55.1 4.4 6.0 56.0 5.2 1.1 19.7 24.9 5.5
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Five key takeaways. We hosted a lunch meeting with CBIP for clients
recently and came away with five key highlights: (1) Unbilled orderbook Issued Capital (m shares) 135.2
Market Cap (RMm) 446.2
of RM300m, bidding for another RM150m worth of contracts; (2) change
Daily Trading Vol (m shs) 0.3
on product mix translates to better margins; (3) Update on progress of
52wk Price Range (RM) 2.35-3.46
zero discharge plant; and (4) Plantation earnings picking up pace while
Major Shareholders: (%)
new planting in Indonesia progressing well; and (5) Private placement
Lim Chai Beng & family 28.5
likely to be aborted. LTH 9.2
♦ Unbilled orderbook of RM300m. As at end-June, CBIP’s unbilled HSBC Holdings PLC 5.9

orderbook was about RM300-350m, of which approximately RM83m were

contracts obtained in YTD2010. It is in the midst of bidding for another
FYE Dec FY10 FY11 FY12
RM150m worth of contracts now and targets to clinch about RM100-120m EPS chg (%) (2.7) (1.9) (2.3)
worth of new contracts by year-end. We expect CBIP to recognise its Var to Cons (%) (5.7) 3.4 (1.7)
unbilled orderbook over the next one and a half years, bringing revenue
from its mill engineering division to RM300-330m p.a. in FY10-11 (after PE Band Chart
including recurrent spare parts and servicing revenue), which is an
annual growth of 10-15% from FY09.
PER = 16x
♦ In Indonesia, CBIP’s planting programme is progressing well. PER = 12x
PER = 8x
Recall CBIP acquired an 85% stake in Indonesian plantation company PT PER = 4x
Sawit Lamadau Raya in Nov 09 for RM4m, which has a licence to
establish a palm oil plantation on 8,000 ha of land in Central Kalimantan.
We understand only about 6,000 ha of this land is plantable and that
CBIP has, up to the current period, planted up about 1,200ha of land
already. Management is targeting to plant up a total of 2,500ha of this Relative Performance To FBM KLCI

land in FY10, and the remaining 3,500ha in FY11, at a planting cost of

FBM KLCI
approximately RM11,000/ha over 3 years.
♦ Risks. Main risks include: (1) a significant decline in oil mill engineering
contracts due to slower-than-expected economic recovery and plantation
investment in Indonesia as well as in Malaysia; (2) a stronger-than- CBIP
expected rise in steel prices and weakening of the US$, resulting in
weaker-than-expected margins for the oil mill engineering division; (3) a
fall in CPO and other global vegetable oil prices caused by weather
abnormalities; and (4) a reversal in crude oil prices and thus CPO prices.
♦ Forecasts. We have revised our forecasts downwards slightly by -1.9-
2.7% for FY10-12.
♦ Investment case. Despite our slight downward earnings revision, our
SOP-based target price is revised upward to RM4.05 (from RM3.70), after Hoe Lee Leng
removing the 10% dilution effect from the proposed private placement, (603) 92802184
which we have assumed will be aborted. We reiterate our Outperform hoe.lee.leng@rhb.com.my
recommendation on CBIP.

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 12 August 2010

X Five key takeaways. We hosted a lunch meeting with CBIP for clients recently and came away with four key
highlights: (1) Unbilled orderbook of RM300m, bidding for another RM150m worth of contracts; (2) change on
product mix translates to better margins; (3) Update on progress of zero discharge plant; and (4) Plantation
earnings picking up pace, while new planting in Indonesia progressing well; and (5) Private placement likely to be
aborted.
X Unbilled orderbook of RM300m. As at end-June, CBIP’s unbilled orderbook was about RM300-350m, of which
approximately RM83m were contracts obtained in YTD2010. It is in the midst of bidding for another RM150m
worth of contracts now and targets to clinch about RM100-120m worth of new contracts by year-end. We expect
CBIP to recognise its unbilled orderbook over the next one and a half years, bringing revenue from its mill
engineering division to RM300-330m p.a. in FY10-11 (after including recurrent spare parts and servicing
revenue), which is an annual growth of 10-15% from FY09. As this is in line with our forecasts, we are leaving
our assumptions unchanged.
X Change in product mix makes for better margins. Of late, CBIP has been awarded contracts which only
involve the manufacturing and supply of machinery and do not include the installation and commissioning of the
mills, the most recent being its RM53.9m worth of contracts from Wilmar awarded in July. We understand that
this type of contract now makes up about 40% of CBIP’s total mill engineering contracts (from about 20% as at
end-09), with the rest coming from the traditional turnkey projects involving both installation and commissioning
services. We are positive on the change in product mix and this new model of operations as it would solve CBIP’s
management and skilled technician shortage problem and could give CBIP better margins, as 50% of the contract
amount is paid upfront and the rest upon delivery, compared to other projects, which are billed progressively.
This would also help save some interest costs, as CBIP would be able to use the upfront payment to purchase the
raw material requirements for the mills, without having to use its own funding first. We understand operating
margins from the pure equipment supply type contract are about 18-22%, while operating margins from the full
turnkey contracts are about 16-18%. Going forward, CBIP intends to continue shifting its sales to more pure
equipment supply contracts in order to be able to satisfy more orders and improve operating margins further,
although it does not foresee a situation where its entire orderbook is made up of these kinds of projects, as there
are still some traditional customers around. Despite this positive development, we have maintained our margin
projections for now, preferring to remain conservative.
X Zero discharge plant still in testing mode. CBIP’s patented zero discharge CPO mill is still in testing mode in
three locations around Malaysia, one in CBIP’s own estate and two in Felda’s estates. We understand the
technology has been tested for two and a half years already and management hopes to be able to commercially
sell these mills from CY11 onwards. Pricing for the zero discharge CPO mill is likely to be an additional RM7m on
top of the normal modipalm mill cost. We understand that these mills, once operational will not only save on
effluent treatment costs, but also bring in extra revenue by way of sale of carbon credits. A conventional mill
discharges about 0.7 tonnes of effluent per tonne of CPO processed, while a modipalm mill discharges about 0.3
tonnes and a zero discharge plant would have no effluent discharge. Nevertheless, we are not imputing any
contribution from the sale of these mills in our forecast as yet, as the risk of further delays of commercialisation is
still prevalent.
X CBIP’s plantation earnings are picking up pace… CBIP’s plantation earnings are picking up pace, as its first
CPO mill in its Sachiew estate already started operations in mid-FY09, while its second mill in the Empresa estate
is expected to start commercial operations soon. We had earlier imputed contributions from the second mill to
start from 2HFY10, but have now shifted it back to start from FY11, to be conservative. Nevertheless, we expect
contribution from CBIP’s plantation division to contribute close to 40% of group earnings by FY11 (from 22.5% in
FY09), on the back of improving age profile of its trees, higher CPO prices and increasing margins on the back of
rising contributions from its CPO mills. We understand that CBIP’s YTD average CPO price achieved is about

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 12 August 2010

RM2,400-2,500/tonne, or about 13-15% higher yoy, while we note that its previously loss-making 30%-owned
associate plantation companies, Bahtera Bahagia and Kumpulan Kris Jati, have turned around and have been in
the black since 3QFY09.

Chart 1. CBIP’s Plantation Division Quarterly Revenue and PBT

26.00
24.00

22.00
20.00
18.00

16.00

14.00
RMm

12.00
10.00

8.00
6.00
4.00

2.00

0.00
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

Oil Palm Revenue Oil Palm PBT

X … while its new planting programme in Indonesia is progressing well. In Indonesia, CBIP’s planting
programme is progressing well. Recall CBIP acquired an 85% stake in Indonesian plantation company PT Sawit
Lamadau Raya in Nov 09 for RM4m, which has a licence to establish a palm oil plantation on 8,000 ha of land in
Central Kalimantan. We understand only about 6,000 ha of this land is plantable and that CBIP has, up to current
period, planted up about 1,200ha of land already. Management is targeting to plant up a total of 2,500ha of this
land in FY10, and the remaining 3,500ha in FY11, at a planting cost of approximately RM11,000/ha over 3 years.
We have now imputed this into our forecasts, although our assumptions are slightly more conservative, as we
project CBIP to plant up only about 1,800ha in FY10, followed by 2,500ha in FY11 and the remaining 1,700ha in
FY12. Contributions from this estate are only expected to start coming through in FY14 onwards. Going forward,
management continues to keep a lookout for more greenfield plantation land to acquire, particularly in Indonesia,
given its success there so far. According to management, pricing of greenfield land is around US$300/ha (or
RM960/ha), while brownfield land is about RM50,000/ha in Indonesia.

X Private placement likely to be aborted. We understand CBIP’s proposed private placement of 10% new issued
shares is likely to be aborted. Recall CBIP proposed the private placement in Oct 09 which was due for completion
by 2Q2010, but subsequently extended the completion date to 21 Dec 2010. Although there is still some time to
the Dec 2010 deadline, we believe CBIP is likely not to go ahead with the placement now. As such, we have now
taken out the 10% dilution effect of the placement we had imputed on our EPS calculation and our SOP-based fair
value.

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Risks
X Main risks include: (1) a significant drop in oil mill engineering contracts due to slower-than-expected economic
recovery and plantation investment in Indonesia as well as in Malaysia; (2) a significant increase in steel prices
and further weakening of the US$, resulting in weaker-than-expected margins for the oil mill engineering
division; (3) a drop in CPO and other global vegetable oil prices caused by weather abnormalities; and (4) a
reversal in crude oil prices and thus CPO prices.

Forecasts
X Revised down slightly. We have revised our forecasts downwards slightly by -1.9-2.7% for FY10-12, after: (1)
pushing back the contributions from CBIP’s second CPO mill to FY11 (from 2HFY10); and (2) imputing additional
capex for CBIP’s new Indonesian plantation venture.

Valuation and Recommendation

X Maintain Outperform with higher fair value. Despite our slight downward earnings revision, our SOP-based
target price is revised upward to RM4.05 (from RM3.70) (see Table 2), after removing the 10% dilution effect
from the proposed private placement, which we have assumed will be aborted. We reiterate our Outperform
recommendation on CBIP.

Table 2. Fair Value Calculation

Target PER (x) RMm
Plantations 12x CY11 420.0
Oil mill engineering & construction 6x CY11 267.3
Net Debt @ end-1QFY10 (141.5)
TOTAL 545.8
Issued shares (‘m) 135.2
RM/share 4.04

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10f FY11F FY12F

Turnover Oil mill division revenue 15 11 7

331.5 584.4 675.5 698.0 growth (%)
Turnover growth (%) (19.1) 76.3 15.6 3.3 CPO Selling Price (RM/t) 2,500 2,700 2,500
FFB Selling Price (RM/t) 500 550 500
Operating Profit 55.0 72.3 84.2 89.2
Op Profit Margin (%) 16.0 12.0 12.2 12.5

EBITDA 65.6 78.7 92.3 98.0

EBITDA margin (%) 19.8 13.5 13.7 14.0

Depreciation (12.4) (8.3) (9.7) (11.1)

Associates (5.5) 4.5 9.5 8.4
Net interest costs (5.8) (6.7) (6.6) (6.4)
Exceptional items (5.5) - - -

Pretax Profit 49.1 70.1 87.1 91.1

Tax (6.8) (8.5) (12.6) (13.4)
PAT 42.3 61.6 74.5 77.7
Minorities (1.9) (1.9) (1.9) (1.9)
Net Profit 40.4 59.7 72.6 75.8
Net Profit (ex-EI) 40.4 59.7 72.6 75.8
Source: Company data, RHBRI estimates

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IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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