Investment Highlights

• We are upgrading CB Industrial Product Holding (CBIP) from SELL to HOLD as its share price has fallen to our fair value of RM1.45/share. Our fair value of RM1.45/share implies an FY19F fully diluted PE of 9x.

• Although CBIP's FY19F current PE of 8.6x is undemanding, we are not upgrading the group to a BUY yet. There is risk of an earnings downgrade if the group does not secure more palm oil mill contracts in FY18F.

• CBIP's 1QFY18 results were within our expectations but below consensus estimates.

• After a meagre net profit of RM0.7mil in 4QFY17, CBIP's net profit rebounded to RM17.8mil in 1QFY18 (1QFY17: RM24.6mil). This was underpinned mainly by a turnaround in the mill manufacturing division. The unit recorded a pretax profit of RM19.3mil in 1QFY18 (1QFY17: RM23.1mil) vs. a loss of RM1mil in 4QFY17.

• The mill manufacturing division recorded a forex gain of RM0.2mil in 1QFY18 compared with a forex loss of RM17.6mil in 4QFY17 as the USD/MYR exchange rate stabilised. CBIP's forex loss amounted to RM34.4mil in FY17.

• CBIP loses when the MYR appreciates against the USD as its overseas contracts are denominated in USD. We believe that more than half of CBIP's contracts are awarded by overseas customers.

• Comparing 1QFY18 against 1QFY17, pre-tax profit of the mill manufacturing division declined by 16.4% YoY to RM19.3mil. This is partly due to a drop in order book in FY17. CBIP only secured RM221.4mil mill contracts in FY17 vs. RM250mil in FY16.

• We expect prospects of the mill manufacturing division to be muted in FY18F. However for FY19F, we believe that CBIP would record a net profit growth of 37.1% due to a lower effective tax rate and rebound in order book. We have assumed that CBIP would receive RM300mil contracts in FY18F.

• Unbilled order book of the mill manufacturing divisionwas RM444mil as at end-March 2018 vs. RM426mil as at endDecember 2017 and RM450mil as at end-September 2017. Unbilled order book of the retro-fitting unit was RM74mil as at end-March 2018.

• CBIP’s gross borrowings rose from RM67.3mil as at endDecember 2017 to RM84.5mil as at end-March 2018. In spite of this, the group’s balance sheet is still healthy as its cash reserves of RM106.8mil is higher than its gross borrowings of RM84.5mil.

Source: AmInvest Research - 30 May 2018