Investment Highlights

• Maintain HOLD on CB Industrial Product Holding (CBIP) with a lower fair value of RM2.00/share (vs. RM2.15/share previously).

• We have reduced CBIP's FY18F net profit forecast by 7.9% to account for a lower order book. CBIP has only received RM160mil mill contracts so far this year compared with its usual RM250mil to RM300mil a year. Our fair value implies an unchanged FY18F fully diluted PE of 11.5x.

• As for FY17F, CBIP's core 9M results (ex-unrealised forex loss of RM16.7mil) were below our expectations due to a higher-than-estimated effective tax rate. Effective tax rate was 24.7% in 9MFY17 against our assumption of 15% for the full year. As a result, we have cut CBIP's FY17F net profit by 12.7%.

• Excluding the forex loss, we estimate that pre-tax profit of the mill manufacturing unit would have declined by 5.5% YoY in 9MFY17. CBIP secured RM250mil contracts in FY16 vs. RM360mil in FY15.

• Unbilled mill manufacturing order book stood at RM436mil as at end-June compared with RM448mil as at end-March 2017.

• Core pre-tax profit margin of the manufacturing division inched up from 23.1% in 9MFY16 to 24.9% in 9MFY17 due to higher value-added contracts.

• We believe that this helped offset an increase in steel costs. According to Bloomberg, average price of cold rolled coil was US$701.32/short tonne in 9MFY17, 21.4% higher than the average price of US$577.50/short tonne in 9MFY16. Steel accounts for more than 80% of production costs.

• Revenue of the retro-fitting unit climbed by 154.0% from RM76.8mil in 9MFY16 to RM195.2mil in 9MFY17 while pretax profit jumped by 36.7%. The surge in earnings was underpinned by a record order book of RM550mil, which was achieved in FY16.

• Unbilled orders of the retro-fitting unit stood at RM355mil as at end-June vs. RM405mil as at end-March 2017 and RM448mil as at end-December 2016.

• CBIP's balance sheet is healthy. Net cash stood at RM82.8mil as at end-September against RM76.5mil as at end-June 2017.

Source: AmInvest Research - 29 Nov 2017