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 fully diluted PE of 11.5x.

• We consider CBIP's 1HFY17 core results to be within our expectations and consensus estimates as most of the group's progress billings are usually recognised in the 2H of the financial year.

• CBIP's net profit rose by 57.2% YoY to RM42.9mil in 1HFY17 underpinned by the absence of losses on investment and forex, and higher earnings contribution from the retro-fitting unit. CBIP recognised equity and forex losses of RM7.8mil in 1HFY16.

• Mill manufacturing division recorded a 14.0% YoY decline in turnover in 1HFY17 due to a lower order book. Excluding the equity and forex losses, we estimate that manufacturing EBIT shrank by 19.1% YoY to RM39.2mil in 1HFY17.

• CBIP received RM250mil new mill contracts in FY16 compared with RM360mil in FY15. Unbilled order book stood at RM448mil as at end-March 2017 against RM441mil as at end-December 2016. We have assumed that CBIP would win RM350mil new contracts in FY17F.

• EBIT margin (ex-equity and forex losses) of the mill manufacturing division was lower at 21.9% in 1HFY17 vs. 23.3% in 1HFY16. We believe that the squeeze in EBIT margin was due to an increase in steel costs.

• According to Bloomberg, average price of cold rolled coil was US$694.04/short tonne in 1HFY17 vs. US$562.12/short tonne in 1HFY16. Steel accounts for more than 80% of production costs.

• Revenue of the retro-fitting unit surged by 125.2% YoY to RM93.8mil in 1HFY17 while EBIT climbed by 200.9%. The division received a record order book of RM550mil in FY16. Unbilled order book of the unit stood at RM405mil as at end-March 2017 vs. RM448mil as at end-December 2016.

• CBIP's balance sheet is clean. Net cash stood at RM76.5mil as at end-June 2017 compared with RM74.3mil as at endMarch.

Source: AmInvest Research - 24 Aug 2017