- Maintain BUY on CB Industrial Product Holding Bhd (CBIP) with an unchanged fair value of RM2.33/share. Our fair value implies an FY16F PE of 13.7x.

- CBIP’s 1HFY15 results were within consensus estimates and our expectations.

- CBIP’s net profit fell by 19.2% from RM22.0mil in 1QFY15 to RM17.8mil in 2QFY15 as effective tax rate rose from 4.9% to 29.2%. On the EBIT level, CBIP’s earnings increased by 28.2% QoQ to RM25.1mil in 2QFY15.

- Modipalm Engineering Sdn Bhd’s tax pioneer status expired in March 2015. The group has applied for a new tax pioneer status in respect of its zero effluent palm oil mills. However, we believe that the new tax status would only come on-stream in 2HFY15.

- On a yearly basis, CBIP’s EBIT improved by 13.8% to RM44.7mil in 1HFY15 underpinned by higher manufacturing profits.

- The unit’s pre-tax earnings strengthened by 10.9% from RM46.4mil in 1HFY14 to RM51.4mil in 1HFY15 due to higher recognition of progress billings. Unbilled sales of the manufacturing division stood at RM480mil as at end- March 2015.

- We expect CBIP’s manufacturing profits to expand going forward driven by RM400mil to RM500mil worth of contracts compared with RM270mil in FY14. The record level of contracts is expected to underpin earnings growth in FY16F.

- Pre-tax profit margin of the manufacturing edged up from 25.2% in 1HFY15 to 25.7% in 1HFY15 on the back of higher selling prices and low cost of steel. Steel is estimated to account for more than 80% of production costs.

- According to Bloomberg, price of cold-rolled coil eased by 19.9% from US$680/short tonne in 1HFY14 to US$544.88/short tonne in 1HFY15.

- Revenue of the retro-fitting division shrank by 46.3% YoY to RM32.7mil in 1HFY15 dragged by an absence of new contracts. Pre-tax profit of the unit fell by 57.8% from RM4.0mil in 1HFY14 to RM1.7mil in 1HFY15.

- Plantation division’s pre-tax losses narrowed from RM4.2mil in 1HFY14 to RM3.5mil in 1HFY15. We expect the division to continue bleeding until the oil palm trees mature in FY17F/FY18F. We estimate planted areas at 6,300ha in Kalimantan as at end-March 2015.

Source: AmeSecurities Research - 19 Aug 2015