Challenging times ahead for CI Holdings

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EXPANSION: The new carbonated PET line costing between RM20 million and RM25 million is expected to increase CI Holdings’ carbonated PET capacity by 30 to 40 per cent, says RHB Research.

KUCHING: Beverage and construction group CI Holdings Bhd (CI Holdings) announced that it was going to add a new carbonated PET line costing between RM20 million and RM25 million which would be operational by mid-2012.

According to RHB Research Institute Sdn Bhd (RHB Research), the new carbonated PET line was expected to increase CI Holdings’ carbonated PET capacity by 30 to 40 per cent.

“We are thus increasing our capex assumptions for FY06/12 to RM35 million, to include the cost of the new line, while we have also imputed the new capacity into our forecast for FY06/13. Note that this will be the last major capex for CI Holdings in the coming years,” said the research firm.

One of the key issues that was highlighted by the research firm was the higher sugar cost structure that affected CI Holdings and 13 other beverage manufacturers, which was implemented beginning in January this year.

In brief, the beverage manufacturers which included CI Holdings, F&N, Coca-cola, among others were no longer allowed to purchase subsidised sugar. The subsidised sugar price was currently RM2.10 per kg while unsubsidised sugar was RM2.62 per kg.

“We understand that the sugar price impact could be mitigated by an average price increase of three to five per cent across the board for CI Holding’s beverage division, although given that it is not generally the price leader, it would wait for competitors such as F&N and Coca-Cola to raise prices before it follows suit,” said the research firm.

It did not expect a price increase in the short term, as competitors such as F&N had other products to fall back on the boost the overall group margins such as its dairy products, while for Coca-cola, given that it was still being bottled by F&N, RHB Research believed that any price increase would be done after its separation from F&N in October 2011.

To overcome this, CI Holdings at the end of the third quarter of FY06/11 started ‘tweaking’ its trade discounts to mitigate the impact of the sugar price increase. Note that trade discounts were discounts of about seven to eight per cent generally given to wholesalers and other distributors.

“We understand that CI Holdings is trying to mitigate the impact of the higher sugar prices by selectively reducing the discounts to protect its margins. Given that it only started tweaking after the festive season, we understand that it is still too early to gauge the impact on both revenues and margins.

“Assuming the method does work on margins, we believe it could put downward pressure on its revenues especially if some wholesalers/retailers refuse to take the lesser discount and not carry CI Holding’s products,” said the research firm.

Given the uncertainty outcome of CI Holding’s tweaking of its trade discounts, RHB Research reduced its revenue growth assumptions for CI Holding’s beverage division for FY11-13 by 0.7 per cent to 2.3 per cent to account for potential volume drop as a result of the tweaking of trade discounts.

In the long run, it believed that the only way for the group to protect its margins was by a selling price increase. It believed that this would only happen once the other players raise prices.