CB Industrial - Manufacturing pre-tax margin almost doubled

- We upgrade CB Industrial Product Holding Bhd (CBIP) from HOLD to BUY, with a higher fair value of RM3.00/share, which is based on FY13F PE of 10x. The group’s PE band ranged from a low of 4x to a high of 21x in the past seven years. Average PE was 10x. 

- CBIP’s 1HFY12 results were above consensus estimates and our expectations due to the near YoY doubling of the pre-tax profit margin of the mill construction division. It appears that profits from CBIP’s mill construction division are able to compensate for the loss in plantation earnings.

- The group has declared an interim gross dividend of 10 sen/share for 1HFY12 (1HFY11: 0 sen/share). CBIP tries to pay out one-third of its net profit annually.

- CBIP’s turnover expanded 21.7% YoY to RM157.7mil in 1HFY12, aided by higher profits from the mill construction and retro-fitting vehicles divisions. 

- As at end-March 2012, the value of CBIP’s contracts stood at RM787.3mil. Out of these, about 45% or RM355.8mil is unrecognised. The unbilled sales of RM355.8mil comprise 1.1x of the division’s revenue in FY11.  

- Pre-tax profit of the mill construction division expanded 116.9% YoY to RM38.5mil in 1HFY12, not only underpinned by an increase in the number of construction contracts but also by enhancements in margins.

- Pre-tax margin of the division strengthened from 14% in 1HFY11 to 24% in 1HFY12 as the company secured a higher proportion of M&E (mechanical and engineering) contracts. Operating margins of M&E contracts are about five to seven percentage points higher than turnkey contracts. 

- CBIP also enjoyed lower cost of steel. According to Bloomberg, price of cold-rolled coil declined from an average of US$783.65/tonne in 1HFY11 to US$767.88/tonne in 1HFY12. Steel is estimated to account for 40% to 50% of production cost.

- Revenue of the retro-fitting vehicles division climbed from RM5.7mil in 1HFY11 to RM107.2mil in 1HFY12 on the back of contracts such as the RM171mil award from the Ministry of Housing and Local Government and RM38mil project to outfit ambulances for the Ministry of Health.

- Due to the increase in the number of contracts, pre-tax profit of the division swung from a negative RM0.7mil in 1HFY11 to a positive RM6.9mil in 1HFY12. The division recorded a pre-tax profit margin of 6.4% in 1HFY12.   

Source: AmeSecurities