- 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.

- Although CBIP’s 9MFY15 results were below consensus estimates and our expectations, we are keeping our forecast as the group’s recognition of progress billings is expected to pick up in 4QFY15. The group’s EBIT improved by 2.8% YoY to RM63.9mil in 9MFY15 driven by the manufacturing division.

- Pre-tax profit of the manufacturing unit expanded by 3.9% from RM67.5mil in 9MFY14 to RM70.1mil in 9MFY15 on the back of increased recognition of progress billings. Unbilled sales stood at RM539mil as at end-June 2015, compared with RM480mil as at end-March 2015.

- Up to mid-October 2015, CBIP had secured almost RM250mil palm oil mill contracts. We think that the group may receive RM350mil to RM400mil contracts in FY15F compared with RM270mil in FY14. This should sustain CBIP’s net profit growth in FY16F.

- Pre-tax profit margin of the manufacturing unit was 23.7% in 9MFY15 versus 22.9% in 9MFY14. We believe that the improvement in margin was underpinned by the low cost of steel.

- According to Bloomberg, average price of cold-rolled coil declined by 22.4% from US$676.92/short tonne in 9MFY14 to US$525.45/short tonne in 9MFY15. Steel accounts for 80% to 90% of total production cost.

- Pre-tax profit of the retro-fitting division fell from RM10.1mil in 9MFY14 to RM4.9mil in 9MFY15 due to the absence of new contracts in FY14. Unbilled sales of the unit were RM130mil as at end-June 2015.

- Plantation division’s pre-tax losses declined from RM6.5mil in 9MFY14 to RM3.9mil in 9MFY15 due to forex gains of RM3.1mil. The unit is expected to be in the red until the oil palm trees mature in FY17F or FY18F.

- CBIP’s effective tax rate rose from 7.5% in 9MFY14 to 23.4% in 9MFY15 as the tax pioneer status had expired in March 2015. The new tax pioneer status, in respect of the zero effluent palm oil mill, is expected to be approved by MIDA soon.

Source: AmeSecurities Research - 19 Nov 2015