- Maintain BUY on CB Industrial Product Holding Bhd (CBIP) with an unchanged fair value of RM3.50/share. Our fair value is based on a FY14F PE of 10x.

- We consider CBIP’s 1HFY13 results to be within consensus estimates and our expectations as the bulk of the group’s progress billings are usually recognised in 2H of the financial year.

- CBIP’s turnover expanded by 10.9% YoY to RM293.8mil in 1HFY13 as recognition of billings accelerated in 2QFY13 compared with 1QFY13. On a QoQ basis, revenue of the mill construction division climbed by 27.7% to RM92.4mil in 2QFY13.

- On a YoY basis, pre-tax profit fell by 10.3% to RM43.8mil in 1HFY13 as share of profits in associates and joint ventures swung from a positive RM3.7mil to a negative RM1.9mil. The turnaround in profitability was due to lower CPO prices.

- Unbilled sales of the mill construction division stood at RM390mil as at end-March 2013. This was about 0.8x of the division’s turnover in FY12.

- Pre-tax margin of the mill construction division was unchanged YoY at 24.5% in 1HFY13 (FY12: 22.4%).

- On a full year basis, we think that CBIP would be able to sustain its pre-tax margins at the 23% to 25% levels on the back of higher valued-added contracts and lower steel costs.

- Mechanical and engineering contracts normally command higher margins compared with turnkey contracts.

- Steel prices remained low in 1HFY13. Steel is estimated to account for more than half of production costs.

- According to Bloomberg, price of cold-rolled coil shrank 9% from an average of US$767.88/short tonne in 1HFY12 to US$698.80/short tonne in 1HFY13.

- We estimate that CBIP received RM150mil to RM200mil worth of contracts year-to-date. The group is hopeful of winning RM350mil to RM450mil contracts in FY13F compared with RM280mil in FY12.

- CBIP’s retro-fitting division is also securing more contracts. CBIP won an RM136.8mil contract from the Ministry of Housing and Local Government Malaysia in July this year. The contract requires CBIP to install and commission 100 units of vehicles attached with water tank trailers for the Fire and Rescue Department of Malaysia.

Source: AmeSecurities