• MYR0.43 FV based on 18x FY25F P/E. CBH Engineering aims to raise MYR83.4m from its IPO for procurement of components, payment to subcontractors, staff expansion, and bank guarantees for future projects. The group is set to benefit from the growth in foreign and domestic investments, property markets, and the data centre (DC) industry. With its above-average profit margins and financial position, its 11.6x FY25F P/E is deemed attractive.
• >30 years of excellence in electrical engineering. CBHB brings >30 years of expertise in designing, constructing, and equipping substations to connect the national grid to end-user premises - catering to industrial, commercial, and residential facilities. With Grade G7 contractor qualification, the group is authorised to undertake projects of unlimited value. In recent years, CBHB has successfully delivered multiple high-margin high-voltage (HV) substation contracts for hyperscale DCs. Leveraging its strong track record, the group is well-positioned to capitalise on the country's target to become a booming DC market, which Mordor Intelligence projects to grow at a CAGR of 17% in 2023-2029 - reaching 1,360MW by 2029 from 540MW in 2023.
• Strong order backlog and tender momentum. As of 25 Nov 2024, CBHB's outstanding orderbook stands at MYR203.7m, with the majority expected to be recognised in FY24 - 80% of this coming from substation jobs. This represents 1.34x of the group's 3-year average revenue of MYR151.88m, reflecting a robust pipeline with an average project duration of 12 months. Additionally, CBHB boasts a record-high tender book worth MYR559.7m. Our FY25 earnings projection assumes a 20% success rate for tender conversions, in line with the group's historical success rate.
• Boosts execution with workforce expansion. CBHB plans to expand its project department by hiring 11 additional employees, increasing its workforce numbers from the current 73. This is expected to enhance its execution capacity by 30% by 2026. Leveraging on performance bonds - typically accounting for 5-10% of contract sizes - raised through IPO funding, CBHB aims to bid for higher-value projects. The group's net cash position is projected to improve significantly, from MYR41.6m to MYR125m post the IPO. With an enhanced financial position and listing status, we believe CBHB is well-positioned to strengthen its competitiveness and attract more prominent clients in future.
• Forecasts and valuation. We project a 3-year earnings CAGR of 12% and ascribe 18x P/E to its FY25F earnings to derive our MYR0.43 FV. This valuation is in line with the forward P/E of its closest peer, as well as the Bursa Malaysia Construction Index (BMCI).
• Key risks: Dependence on the DC industry, shortage of skilled workforce, lack of long-term contracts, and non-renewal of licenses.

Source: RHB Research - 2 Jan 2025