-  Maintain BUY on CB Industrial Product Holding Bhd (CBIP) with a higher fair value of RM4.30/share. Our fair value is based on a FY14F PE of 12x.

-  Risk to our Buy recommendation is CBIP’s venture into oil and gas, if any. We believe that this would change the group’s risk profile. We understand that CBIP would provide more details in the future.

-  Excluding the RM5.4mil gain on forex, CBIP’s FY13 results were within consensus estimates and our expectations. We believe that the forex gain was in respect of amounts due from overseas customers, which are denominated in USD.

-  CBIP’s EBIT rose by 28.1% to RM107.8mil in FY13 underpinned by margin enhancements and a higher value of contracts. Revenue growth was 11.1% in FY13.

-  We estimate that CBIP secured RM320mil mill construction contracts in FY13 compared with RM280mil in FY12. The group’s retro-fitting vehicle division also enjoyed an increase in the number of contracts. The unit received an RM136.8mil contract last year.

-  Unbilled sales of the mill construction division stood at RM430mil as at end-Sept 2013 while that of the retro-fitting division amounted to RM285mil.

-  CBIP’s unbilled sales of RM430mil is about 0.8x-0.9x of the group’s mill construction revenue annually.

-  Pre-tax profit margin of the mill construction division rose from 22.5% in FY12 to 25.7% in FY13 due to a fall in steel prices. Steel is estimated to account for 70% to 80% of production costs.

-  According to Bloomberg, average price of cold-rolled steel contracted by 5.3% from US$725.96/short tonne in FY12 to US$687.60/short tonne in FY13.

-  Plantation division recorded a pre-tax loss of RM4.7mil in FY13. The division has not generated any revenue yet as CBIP has just commenced planting oil palm in Indonesia.

-  Going forward, we expect Africa and Central America to be new markets for CBIP. This should help cushion any slowdown in the award of contracts in Indonesia.

-  New plantings in Indonesia had softened in the past few years due to slower land approvals and negotiations with the natives. There has also been intense scrutiny from environmental organisations. 

Source: AmeSecurities