Tuesday, 22 December 2015

Oil Palm Rising Star: CBIP

CBIP started to venture into oil palm plantation business in 2005 with a reported small plantation size of just 2,650 hectare.

Lets look at the financial performance of its plantation segment in order to know its history.

FY Revenue PBT
2005 8.9 -1.4
2006 14.7 2.6
2007 25.7 12.8
2008 53.2 21.8
2009 60.3 14.8
2010 80.5 27.4
2011 132.7 36.2
2012 0 148.3
2013 0.2 -5
2014 1.0 -11
9M15 1.4 -3.9

As we can see from the table above, CBIP's plantation revenue increased progressively from RM8.9mil in 2005 to RM132.7mil in 2011.

Its plantation segment also recorded increasing profit in this period of time.

Suddenly there was zero revenue in 2012 but PBT was RM148.3mil.

This was because CBIP sold all its wholly-owned plantation asset in Malaysia in 2012 with a disposal gain of RM154.4mil. Without this, its plantation segment actually registered a small operating loss of RM3.8mil.

Apart from about 7,000 ha plantation in associate & JV companies in Sarawak, from 2012 onward, everything started from zero in which CBIP started to plant oil palm trees in those huge landbanks in Kalimantan Tengah it acquired at the same time.

So, we can say that CBIP just started a whole new page on its plantation business in 2012.

It's like a newcomer in plantation.

Below are some brief history of CBIP plantation business.

  • Started plantation business with size of 2,650 ha
  • acquired 100% of Sanchiew plantation
  • acquired 100% of Empressa S/B
  • acquired 30% of Bahtera Bahagia S/B (associate company until today)
  • acquired 30% of Kumpulan Kris Jati S/B (associate company until today)
  • Total planted area reached 14,500 ha
  • acquired 85% of PT Sawit Lamandau Raya
  • disposed 100% of Sanchiew & Empressa (which are main revenue contributors)
  • acquired 94% of PT Berkala Maju Bersama (17,382 ha plantation land)
  • acquired 94% of PT Jaya Jadi Utama (15,430 ha plantation land)
  • acquired 94% PT Gumas Alam Subur
  • acquired 94% PT Karun Sumber Rezeki
  • acquired 94% PT Mayangan Jaya (21,674 ha plantation land)

It's clear that before 2012, CBIP's main plantation revenue came from Sanchiew & Empressa which were entirely sold in 2012.

Bahtera Bahagia & Kumpulan Kris Jati are its associate companies until today.

The management grabbed the opportunity to acquire huge plantation landbank in Indonesia by selling its profit-making smaller prime estates. I think it was a good move.

Now CBIP has 86,715 ha of plantation landbank and this can make it a significant player in the industry.

The management target to own 100,000 ha plantation in Indonesia, and set a target to plant 6,000 ha of oil palm per year.

Year New Planting (ha) Total Planting (ha)
2013 2700 4400
2014 1670 6070
9M2015 504 6574

Up to FY14 which ended on Dec14, CBIP has only planted a total of 6,070 ha of oil palm on its Indonesia land.

After 9 months into 2015, it has only planted an additional 504 ha, which was way below its target.

If we assume new planting to start in 2012, the oldest trees are just 3-4 years old which are essentially immature.

So, I think its plantation segment will continue to register loss in the next 1-2 years especially when CPO price stays lowish.

Its plantation in Indonesia is expected to generate revenue in the first half of 2017 when its first mill is expected to be completed.

I came to know CBIP since many years ago. It gives me an impression of a good company though I have never invested in it before.

CBIP has 3 business segment which are:
  • Palm oil mill equipment & work (POME)
  • Retrofitting special purpose vehicles (RSPV)
  • Oil palm plantation

POME is the main revenue & profit contributor for CBIP, with 75% revenue and 90% profit came from this segment in FY14.

Its Modipalm brand of palm oil mill seems to have a significant competitive edge, with higher OER, lower manpower requirement and offers more cost-saving compared to conventional mills.

CBIP's POME's order book is quite stable. It can always maintain the outstanding orders value at above RM400mil with consistent new orders.

Up to today (end Dec15), it has secured about RM450mil of new orders in 2015 and its latest outstanding orderbook stands at above RM550mil

However, this figure only represents about one year plus of earning visibility as its revenue from POME segment a year is about RM400mil.

Its Modipalm POM pioneer status has expired since Feb15 so its effective tax rate has normalised to 25%.

Previously the company's tax rate was just around 7%.

So, its latest 2 quarters' net profits have reduced significantly due to higher tax rate.

Nevertheless, it is expected to regain the pioneer tax status with its zero discharge waste management system for its POME division.

CBIP's RSPV division is about designing, manufacturing and maintaining special purpose vehicles such as ambulance, fire fighting, utility, military vehicles etc.

It contributes less than 20% of CBIP's revenue and even less in profit attributable to common shareholders as 49% net profit in this division will go to minority interest.

Personally I don't really like this division and will just ignore it. It will become more negligible when contribution from plantation starts to grow.

I opine that CBIP's management team is great. The company's cash flow and balance sheet is also strong.

Despite "poor" financial results in the last 2 quarters, CBIP's share price does not drop. This shows that most investors know this company well, and know what to expect.

At RM2.03 now, it is trading at actual PE of 11.5x, and potential forward PE of more than 15x.

The company bought back it shares regularly since mid-2015, which might show that the management thinks the company is undervalued at below RM2.

Without a doubt, CBIP is a solid company and worth for long term investment. 

Its 86,000 ha of plantation landbank is not a small size.

However, investors might not see desirable growth perhaps until year 2018, which is an "inauspicious" year which marks the 10 years anniversary of global financial crisis.

The positive catalyst for CBIP in the near term should be the pending new pioneer tax status for its POM.

I'm not sure when can it be approved since the government seems to look for more money frantically from anywhere possible to counter its reducing income.

The negative aspect of CBIP's plantation might be its slow new planting. 

Though it plans for 6,000 ha new planting a year, so far it only planted 500 ha in 2015. That's way out of target.

If it continues like that, then I think its attractiveness will be reduced.

Though I still do not own any CBIP shares, I foresee that I will be part of the company in the future.


  1. apart from annual report, may i know what're the material you read when you write this article... Being a small shareholder of CBIP, I have to admit I did lesser homework and my understanding to this company isn't as great as yours. For those who own CBIP, they really got to think about holding it for a real long term(at least 2~3years). The upcoming quarter is expected to be less attractive, but if we really look into cash flow and balance sheet, it is still very strong! I will be continue holding this counter until 2017(at least). I believe the management of CBIP would not let me down :)

    1. I got the info from some analyst reports & news articles available online, and also the company's website.

  2. You mentioned :"2018, which is an "inauspicious" year which marks the 10 years anniversary of global financial crisis."
    Big bear normally comes after big bull. Assuming big bear returns in year 2018, then 2016/7 should be good years lo. I hope so as my both hands are full of stocks now :)
    I also notice big bull comes along with US interest rate hikes. US just had it's first interest rate hike and more hikes to come in year 2016/7, so does that hint big bull is coming..haha, I am just speculating.

    1. Haha, I hope that market is as easily predicted as we think :)

      BTW, investors will surely feel jittery when 2017/18 is approaching.

  3. I would say CBIP's decision to venture heavily into palm oil plantation causes me to lost interest in it.

    Developing palm oil mill and sell it to plantation companies is the best business they can be in. Patent, high margin, barrier of entry, high ROE. All plantation companies need to keep buying mill just to stay ahead in the game. Plantation is a low margin business, operation efficiency is key to survival.

    So it makes me wonder why do they decide to go into plantation. Name me the best plantation companies, Sime Derby, Genting Plantation, what is their ROE? 6%. What is CBIP's ROE 12-13%.

    Why does a company wants to take their hard earn money from a high return business and throw it into a commodity business confuses me even more. I have no doubt their revenue or profit will double triple in the future, their ROE will continue to fall the more they plant trees.

  4. I agree with Jia Yeo. I think CBIP is going to wrong direction.


  5. During 2013, CPO price was at its peak. Perhaps, this attracted CBIP went into CPO plantation again... However, they didn't plant as much as they targeted to in the following years, might due to CPO price as well...
    I do not know study much about other plantation counters, but CBIP is a time proven good management company. Are SD, GenP all good or they just drove on the increasing of CPO price for the past decade and grew? I don't know...
    Most of CBIP's landbank are located at Indonesia, could this make them a different1 compared to other CPO leaders in Malaysia? Only time will tell... I would continue to hold my little CBIP shares and let's see how would it be... :)

  6. I would think a company needs to find way to grow. If CBIP still has "large space" to grow in palm mill business, I believe they will just focus on this business due to high ROE & etc.
    But I believe CBIP is at the stage to look for other business ventures to grow their revenue and profit, so they looked around. I suppose that's why they ventured into special vehicle segment earlier but that is not related to their core business at all (BD doesn't like that).
    When they venture into plantation, it is at least more related to their palm oil mill core business. I agree that ROE may fall, but at least CBIP's business would not be stagnant or slow growth, which is worse I think.
    I also think palm oil plantation business is not really a bad business though it is cyclical.

  7. That's how a stock market work, you can only buy the shares when someone with different opinion is willing to sell to you :) It's hard to tell who is right or wrong. Personally I look at this diversification positively. Lower ROE is alright if there are EPS growth and good cash flow.

  8. Dear BD
    Do they have plant and resell the plantation policy or keep for long term yield?

    1. I don't think there is such policy in place. Management should act & decide accordingly when opportunity arises. I opine that this time CBIP will hold its plantation long term.

  9. BD, EPS growth is certain. If you put your money in FD and never touch it for 10 years, it will still grow by itself. The question is how fast it is growing? The answer still goes back to what is the ROE? Higher ROE, the faster the money is rolling, the higher valuation it should have. Lower ROE lower valuation.

    In the long term, assume CBIP net income = Cash flow from operations. Planting per hectare cost RM16K. 6,000 hectare cost 96mil. CBIP average profit over past 4 years is 133 mil. 133-96= 37mil free cash flow. We haven't include capex for palm oil mill yet.

    I am 100% sure few years down the road the money flowing in from selling palm oil will increase cash flow. But like I say those money are throwing into a low ROE business.

    In valuing business, it is all about how much a business is adding value? That is ROE - Cost of capital. The smaller the spread the less valuable it is.

    Whether the palm oil mill business how big is the market I dont have the figure but CBIP is only making 500-600 million a year. I doubt the whole market is that small. KLK depreciation a year is already 300 mil, alone.

    As a shareholder, ROE is your return. If management is going to throw shareholders' money into something that generate crappy return for the sake of growing, it just doesn't make sense. When they are in palm oil mill business every dollar invested return 20-30 cents. Now the mgt says to grow our revenue and become bigger, a dollar invested will give you 10 cents in the future. I am not sure if you will feel richer. Maybe you think you will get higher dividend because of growing EPS. But like I said, dividend still comes from ROE at the end of the day.

    1. Thanks JiaYeo, I really appreciate your feedback. You must be a true value investor.

      It all depends on how its POM business will grow in the future, which I'm also not so sure. It may get stagnant, which will lower its ROE, or go downhill. However, I think it is more likely to grow and the management should reduce new planting if more capex in POM is needed, in order not to affect its growth negatively.

      Without tax incentive, its POM's ROE will not be that high. It may get back the pioneer status soon but it will not last forever, may be 5-10 years? Management may foresee this and think that it should not rely too much on this segment for growth.

      I agree that plantation is generally a low yield business. CBIP should look up to companies like United Plantation. On whether it has made a right decision, only time will tell, in long term.

  10. Hi BD, you mentioned CBIP had secured about RM450mil of new orders in 2015, where the info came from? The total figure that announcements in Bursa didn't sum up or close to this figure.