Lim: ‘We are building on average one mill per month at our plant here.’

27/04/2015 (The Star) - The plantation industry is all about economies of scale and in the palm oil milling process, every drop of oil to be squeezed from the palm fruit counts.

A key measure of palm oil milling efficiency is how much oil it can extract from a fruit bunch. The higher the extraction rate, the more money the mill can make, assuming that it can keep production cost down.

To improve their milling process, big plantation companies like Sime Darby Bhd, United Plantations Bhd and PT Astra Agro Lestari have turned to specialist CB Industrial Product Holdings Bhd (CBIP), for the company’s Modipalm mill.

“We are building on average one mill per month at our plant here,’’ CBIP managing director Lim Chai Beng tells StarBizWeek.

“All the prefabrication work for the Modipalm mill, the parts needed for the mill, are all done here. The mill can be shipped and assembled anywhere in the world,’’ he says.

Last week, CBIP secured its 100th Modipalm mill order from a client in Indonesia. Lim says the company has a healthy pipeline of new orders coming in from local planters and Indonesian clients.

The recent RM25.5mil mill contract lifted the group’s order book for the year to RM106.6mil. Analysts expects the group to secure around RM300mil worth of new orders this year.

“The latest job listed CBIP’s total outstanding order book to above RM500mil, which means earnings visibility until the fourth quarter of 2015 for its palm oil mill equipment division,’’ Kenanga Research says.

The palm oil engineering business generated about RM400mil in sales last year and commands a healthy margin of 22%, according to Kenanga.

But the expiry of the pioneer tax status for its Modipalm continuous sterilisation process this year would dent net profit contribution from the division, analysts say.

To boost sales and profits, Lim says the company is focusing on new milling technology, particularly on waste and effluent management for its Modipalm mill.

“Over the past decade or so, we have made a lot of refinement and enhancement to the Modipalm continuous sterilisation system, resulting in cleaner, more reliable and efficient mill,” Lim says.

CBIP had been selling Modipalm mills since 2003.

To overcome an initial issues of chain breakages at its continuous steriliser mechanism, the company has come up with double deck system and strengthened the links from 20 tonnes to 50 tonnes.

This increases the service factor by 150%, Lim said, while chain durability is now expected to last five years.

Even the layout of the Modipalm mill was changed to comply with the new safety and environmental regulations.

“Our new mills are designed and built to same standard in the food processing industry,’’ Lim says.

And key players in the industry are taking note of the progress.

Earlier this month, the company secured a RM49.8mil contract from United Plantations Bhd to design and build a mill with a processing capacity of 60 tonnes of fresh fruit bunches an hour.

Apart from building new mills, Lim says the company is seeing rising demand from plantation owners to convert and upgrade their older mills.

He cites key advantages of the Modipalm mill system over conventional mills; higher oil extraction yield, lower operating and maintenace cost, and higher safety standards.

Lim claims that Modiplam mill owners could save as much as RM1mil a year compared with a similar sized conventional mill from lower labour cost and maintenance alone.

Over the past ten years, Modipalm mills have gained international recognition and are currently operating in countries around the region, to as far as Central America, Africa and Papua New Guinea.

There are more than 40 Modipalm mills in Malaysia, which is about 15% of the total number of palm oil processing mills in the country.

CBIP made a net profit of RM92.7mil on revenue of RM565.4mil for the financial year ended Dec 31, 2014.

The company, however, is facing a tougher year ahead due to the weak CPO selling prices and a higher effective tax rate following the expiry of its pioneer status.

Kenanga Research estimates that earnings in financial year 2015 to contract to RM84mil (15.9 sen a share), before recovering to RM105mil (19.9 sen a share) in financial year 2016.

Shares in CBIP was last traded at RM2.07 yesterday.

The stock was able to command a higher valuation compared with peers because of its orderbook-based earnings, Kenanga says. The downside risk, however, is the unpredictable nature of the group’s retrofitting and maintenance of special vehicles division.

Revenue

CBIP, through a subsidary, supplies ambulances and fire fighting vehicle to the Government. Last year, the division generated some RM150mil in revenue, down from about RM250mil in financial year 2013.

The unit, AVP Engineering (M) Sdn Bhd, supplies about 200 units of vehicles to the Health Ministry a year.

CBIP also has its own palm oil plantation business.

In Indonesia, the group has 70,000 ha of greenfield project in Kalimantan Tengah. So far, more than 6,000 ha had been planted, but the plantation has yet to make significant contribution to the group.

“We continue to plant aggressively in Kalimantan Tengah and expect contribution to commence in 2016,” Lim says.

Apart from its Indonesian venture, CBIP is also in a joint venture with Tradewind Plantations with a total planted area of 20,000 ha in Sarawak.

Lim says the company is considering exiting from the joint venture to focus on its own greenfield project in Indonesia.

Indonesia, the world’s biggest crude palm oil (CPO) producer, reported an output of 33.5 million tonnes in 2014. The figure is projected to increase to 40 million tonnes in 2020.

Malaysia produces 19.7 million tonnes of CPO last year.

Analysts said rising CPO production worldwide is putting the lid of prices despite growing global demand for edible oil.

CPO futures contract prices on Bursa Derivatives, the global benchmark for the product, had fallen 18% over the past one year to settle at RM2,170 a tonne yesterday.

Like its plantation peers, shares in CBIP had been hit by the falling prices of CPO.

Lim, however, is optimistic that demand for the Modipalm mills will anchor the group’s performance in the coming years.

“We are targeting to increase our local market share from 15% to 25% in the near term,’’ he says.

Growth, he says, would come from commissioning of new plants as well as conversion jobs at older mills.

Indonesia will be another key market as expanding plantation land fuels demand for new mills.