Stock Name: CBIPCompany Name: CB INDUSTRIAL PRODUCT HOLDINGResearch House: RHB
CB Industrial Product Holding Bhd
(June 2, RM4.30)
Upgrade to outperform at RM4.26 with revised fair value of RM5.90 (from RM4.90): CBIP entered into two share sale agreements to dispose of its 100%-owned subsidiaries, Sachiew Plantations Sdn Bhd for RM108.12 million cash and Empresa (M) Sdn Bhd for RM159.94 million cash.
Apart from the consideration for Sachiew, the purchasers have also agreed to settle all amounts owed by Sachiew to CBIP totalling RM2.88 million, to take over two hydrogenated palm oil (HP) facilities amounting to RM1.48 million and to assume a RM60 million corporate guarantee granted by AmBank (M) Bhd.
For Empresa, the purchasers have also agreed to settle all amounts owed by Empresa to CBIP totalling RM6.44 million, to take over a RM300,000 HP facility and to assume a RM65.25 million corporate guarantee granted by OCBC Al-Amin Bank.
Sachiew is the holder of a provisional 60-year lease for 3,720ha of land in Suai, Miri, which also has a 30-tonne per hour'' crude palm oil mill. Empresa is the holder of a provisional 99-year lease for 5,936ha of land in Bok, Miri, which has a 45-tonne per hour CPO mill.
The Empresa land is the subject of a dispute concerning native customary land rights (NCR). The indigenous people are claiming 3,307ha of land. Besides this claim, the Empresa land is also the subject'' of two other ongoing NCR disputes.
The rationale for the disposal is for CBIP to unlock the value of its investments while enabling it to focus on its core business of manufacturing palm oil equipment. CBIP will record an estimated gain on disposal of RM140.8 million, or about RM1.07 per share. CBIP will use the sale proceeds for working capital and to defray the disposal expenses of RM3 million, to be utilised within two years. The disposal is to be completed by 3Q11. CBIP's net gearing will fall to 0.09 times (from 0.47 times) after this disposal.
Based on the total consideration (including liabilities to be assumed) and excluding a value of RM75 million for the two CPO mills, CBIP is receiving about RM21,140 per ha for the land, which is on the lower end of previous transactions ranging between RM20,000 and RM40,000 per ha for brownfield land in Sarawak. On a price-earnings ratio basis, however, the transaction is valued at about 16.6 times FY10 PER, on the high end of peer valuations of other plantation companies of 12'' to 17 times.
The main risks include: (i) a significant decline in oil mill engineering contracts due to slower than expected economic recovery and plantation investment in Indonesia as well as Malaysia; (ii) a stronger than expected rise in steel prices and weakening of the US dollar, resulting in weaker than expected margins for the oil mill engineering division; (iii) a fall in CPO and other global vegetable oil prices caused by weather abnormalities; and (iv) a reversal in crude oil prices and thus CPO prices.
This will reduce our forecasts by 3.4% in FY11, and by 9% to 14% for FY12/13. Despite our earnings reduction, we raise our sum-of-parts-based target price for CBIP to RM5.90 (from RM4.90), after updating for the cash to be received from the disposal.
We believe CBIP could put the cash to good use by either returning the money to shareholders or by investing in another asset which provides better returns. As such, we upgrade our recommendation on CBIP to 'outperform' (from 'market perform'). ' RHB Research, June 2
This article appeared in The Edge Financial Daily, June 3, 2011.
