Investment Highlights

• We are downgrading our recommendation on CB Industrial Product Holding (CBIP) from HOLD to SELL with a lower fair value of RM1.45/share (vs. RM1.85/share previously). Our fair value of RM1.45/share is based on a FY18F PE of 12x.

• We have cut CBIP's FY18F net profit by 24.5% to account for a weaker EBITDA margin of 13% (vs. 15.5% originally) as the strong MYR is expected to affect the earnings of overseas contracts.

• CBIP's FY17 net profit fell short of our expectations and consensus estimates. The group's net profit was only RM0.7mil in 4QFY17 compared with RM6.8mil in 3QFY17 due to a forex loss of RM17.6mil. Forex losses amounted to RM34.4mil in FY17.

• We believe that more than half of CBIP's contracts are awarded by overseas customers. Hence, the appreciation of the MYR had affected the translation of earnings of the overseas palm oil mill contracts, which are priced in USD.

• As a result, the mill manufacturing division swung into a small pre-tax loss of RM1mil in 4QFY17 vs. a profit of RM5.1mil in 3QFY17. For the full year, pre-tax profit of the mill manufacturing division plunged by 60.1% from RM108.8mil in FY16 to RM43.4mil in FY17.

• Apart from forex, the performance of the mill manufacturing unit was exacerbated by a decline in order book. CBIP received only RM250mil mill contracts in FY16 compared with RM360mil in FY15. This resulted in weaker mill manufacturing earnings in FY17. Each palm oil mill takes 12 to 18 months to complete.

• Prospects of the mill manufacturing division are expected to be unexciting in FY18F as order book continued to fall in FY17. CBIP received RM221.4mil mill contracts in FY17 vs. RM250mil in FY16 and RM360mil in FY15.

• Unbilled mill manufacturing order book stood at RM426mil as at end-December vs. RM450mil as at end-September 2017. So far in FY18F, CBIP has won a RM61mil mill contract. This was awarded by the Prosper Group.

• Pre-tax profit of the retrofitting unit expanded by 102.2% from RM158.4mil in FY16 to RM320.1mil in FY17 underpinned by a record order book of RM550mil. We believe that earnings of the retrofitting division would sustain in FY18F. Unbilled order book of the retrofitting unit was RM130mil as at end-December compared with RM250mil as at end-September 2017.

• CBIP's balance sheet is healthy. Net cash stood at RM82.7mil as at end-December 2017 against RM94.4mil as at end-December 2016.

Source: AmInvest Research - 1 Mar 2018