Aug 16, 2010

CBIP : To sell plantation assets? Buy

CB INDUSTRIAL PRODUCT HOLDING stock code 7076  Price: RM3.31 Fair Value: RM3.85 
By AmResearch

cbip-financial-data 
•  The Edge Weekly reported that CB Industrial Product Holding Bhd (CBIP) may be selling its plantation assets. 
•  Currently, CBIP’s plantation assets are held by associates, a joint venture and a subsidiary. CBIP’s plantation landbank amount to about 9,656 ha (joint venture’s and subsidiary’s
stake). 
•  We view the proposed disposal of plantation assets positively. Although CBIP would lose earnings contribution from the plantation division, which is a source of recurring income, we believe that it would allow the group to be more focused on its mill construction business. 
•  In addition, CBIP would be selling its plantation assets at a period when CPO prices are high – currently hovering between RM2,600/tonne to RM2,700/tonne.  
•  With the proceeds from the disposal of the plantation assets, CBIP would be able to expand the production capacity of its mill construction business. This would help compensate for
the loss in earnings of the plantation division. 
•  Currently, CBIP builds between 12-15 mills a year. The plantation division is expected to account for 30%-40% of FY11F EBITDA.   
•  We estimate the value of the plantation division at RM235mil based on FY11F PE of 8x on the subsidiary’s earnings. From a replacement cost perspective, the plantation division (only subsidiary’s and joint venture’s stake) could fetch a value of RM245mil based on landbank value of RM35,000/ha. CBIP’s investment cost in the associates was RM49mil.
•  The price of greenfield plantation landbank in Sarawak is about RM5,000/ha to RM7,000/ha. The price of prime landbank in Sabah is more than RM60,000/ha presently.  
•  We believe that the buyers may be plantation companies in Sarawak such as Sarawak Oil Palms Bhd, Tradewinds Plantation Bhd or even timber companies with plantation operations like Jaya Tiasa Holdings Bhd.  
•  We maintain a BUY on CBIP for its undemanding valuations and proven track record in the mill construction business.   

By AmResearch