We cut our FY20F net profit forecast by 20%, but maintain our numbers for FY21-22F, as we believe the earnings outlook for C.I. Holdings (CIH) to stabilise after the soft patch currently. We raise our FV by 39% to RM1.42 (from RM1.02 previously) based on 7x FY21F EPS (upgraded from 5x previously to reflect the much improved market sentiment, but still at a 2x multiple discount to the historical average of 9x to reflect the increased competition in the edible oil market). We see value in CIH in a liquidity-fueled market at present, coupled with an attractive dividend yield of 6.7% per annum. Upgrade our recommendation to BUY from HOLD.
We forecast a recovery in CIH’s margins in FY21F, in the absence of unfavourable forex hedging positions (which have resulted in lumpy forex derivative losses in FY20F; we consider forex derivative gains/losses as an operating item given their recurring nature in CIH’s export business). In addition, margin improvement will also come from the change in sales mix towards higher-margin direct sales vs. toll packing sales.
The downgrade in our FY20F forecast is to reflect lower margins due to forex derivative losses on the back of the USD’s strength vs. the ringgit, as mentioned. CIH’s operating margin eased to only 0.8% in 3QFY20 (vs. 3.5% in 1HFY20) as the ringgit weakened to RM4.32/USD as at end-Mar 2020 vs RM4.09/USD as at end Dec 2019.
We like CIH for its undemanding valuations, attractive dividend yield and the stable nature of its edible oil business
Source: AmInvest Research - 21 Jul 2020