Investment Highlights

• Maintain HOLD on CB Industrial Product Holding (CBIP) with an unchanged fair value of RM2.15/share. Our fair value implies a FY18F PE of 11.5x.

• We consider CBIP's 1QFY17 core results (excluding forex gains of RM0.144mil) to be in line with our expectations and consensus estimates as the group usually recognises bulk of the progress billings in 2H of the financial year.

• Earnings contribution from the retro-fitting division improved in 1QFY17. Retro-fitting unit accounted for 19.9% of CBIP's pre-tax profit in 1QFY17 vs. 8.0% in 1QFY16.

• Revenue of the retro-fitting division soared by 326.9% from RM10.2mil in 1QFY16 to RM43.7mil in 1QFY17, underpinned by a record order book of RM550mil. Unbilled sales of the unit stood at RM448mil as at end-December 2016 vs. RM530mil as at end-September.

• As a result, pre-tax earnings of the division expanded by 242.1% from RM1.7mil in 1QFY16 to RM5.7mil in 1QFY17. In spite of the higher turnover however, EBIT margin of the retro-fitting unit shrank from 16.4% in 1QFY16 to 13.1% in 1QFY17.

• Revenue of the mill manufacturing unit declined by 15.6% YoY to RM86.5mil in 1QFY17 due to a lower order book. CBIP secured RM250mil of new mill contracts in FY16 compared with RM360mil in FY15. Unbilled order book stood at RM441mil as at end-December 2016 vs. RM493mil as at end-September 2015.

• In spite of the drop in turnover, EBIT margin of the mill manufacturing division rose from 18.9% in 1QFY16 to 26.7% in 1QFY17. EBIT of the mill manufacturing division improved by 19.0% YoY to RM23.1mil in 1QFY17.

• We believe that the improvement in EBIT margin was due to the absence of losses in investments, which took place in 1QFY16. CBIP recorded a RM3.0mil loss on equity investment and RM4.8mil forex loss in 1QFY16.

• Excluding the loss on equity investment and forex loss, we reckon that EBIT margin of the mill manufacturing division would have been flat at 26.7% YoY in 1QFY17. Earnings of the unit would have declined by 15.1% YoY in 1QFY17.

• CBIP's balance sheet is clean. Net cash stood at RM74.3mil as at end-March 2017 against RM131.5mil as at endDecember 2016.

Source: AmInvest Research - 31 May 2017