Summary
With >30 years of experience in M&E engineering solutions, CBHB is well equipped with the capability to design and build HV substations, offering a comprehensive one-stop solutions.
Future earnings growth will be driven by a strong tender book pipeline >RM600m. With a conservative historical success rate of 20%, potential wins could boost the order book to over RM300m, providing earnings visibility up to a year.
We initiate coverage on CBHB with a BUY recommendation and a target price (TP) of RM0.54 pegged to 18.0x P/E ratio based on FY26F EPS of 3.0 sen and appraised with three-star ESG rating.
Investment Highlights
Electrical Engineering Service Provider. CBHB has more than 30 years of experience in M&E engineering solutions, with expertise in the design and construction of LV, MV, and HV substations, primarily serving the private sector. In recent years, CBHB has successfully delivered four HV substation projects (132kV/275kV) for data centre (DC) owners. Thanks to its extensive expertise in HV substations, CBHB continues to secure high-value projects, including three ongoing HV substation projects, bringing the total contract value of completed and ongoing projects to >RM600m. With its strong track record in the HV substation sector, CBHB is well-positioned to capitalise on the region’s expanding DC industry, which demands complex substation designs to ensure a stable and highly redundant electricity supply for operations.
Potential orderbook replenishment over the near-term. CBHB is experiencing early signs of growth, as demand for HV substations from DC owners has led to a doubling of its earnings to RM44.3m in FY24, reflecting a three-year CAGR of +131.2%. Driven by strong execution in HV substations projects, CBHB is receiving more tender invitations from DC owners, with its tender book now reaching RM620m, of which 90% is related to substations. Even with a conservative historical success rate of 20%, potential contract wins from this tender pipeline could boost CBHB’s order book to over RM250m by the end of FY25F. Looking ahead, we are projecting an annual order book replenishment rate of c.RM300m in FY25F–FY26F, premised to CBHB’s strong historical track record. As of Dec 2024, unbilled orderbook stood at RM142.9m.
Superior profit margin. CBHB has consistently achieved core net margins of between 12-16%, outperforming industry peers. This is driven by its (i) expertise in the design-and-build capabilities of HV substations, hence commanding superior margins, (ii) long-standing supplier relationships that enables cost-efficient procurement, and (iii) labour-light business model, which subcontracts all labour-intensive work. We project a more conservative margin for HV substation projects due to the increasingly competitive landscape. Overall, we project core net profit to grow at a three-year CAGR of 20.4% from FY24 to FY27F.
Ramping up capacity. CBHB plans to utilise RM77.7m (93.2%) of the IPO funds for working capital to support its business growth. This funding will address the financial demands of performance bonds (5–10% of the total project value) and mitigate cash flow mismatches during project execution. Of this amount, RM3.5m is allocated to enhance its project capacity by expanding its workforce with skilled professionals. We believe this expansion will enable improved order fulfilment, positioning CBHB to better manage larger-scale projects.
Data center job prospects remain strong. We understand CBHB's high exposure to data centre development has raised investors’ concerns regarding its growth trajectory. However, our checks show that there is no slowdown in existing DCs projects, with construction even accelerating. We believe demand for DCs in Malaysia is unlikely to slow down, driven by the robust capex plans from hyperscalers (Amazon, Google, Microsoft, and Oracle) totalling over USD44bn in the coming years, with more than half of this investment targeted for Malaysia. The growth trajectory remains intact, considering (i) Malaysia’s strategic location near Singapore, and (ii) affordable electricity, water and land, which are key components needed for cooling and power in DCs, the low-cost business environment and abundant resources make Malaysia an appealing option for hyperscalers to set up regional DC hubs in the region. Note that the ruling to cap 7% exposure to Tier-2 countries for the deployment of AI chips has yet to be finalized, with a decision expected in May. This leaves room for potential revisions or modifications to the current AI chip export restrictions.
Not just about DCs. Based on the NETR, the capex required for grid development between 2023 and 2050 amounts to RM420bn, with 29% allocated for transmission, 52% for distribution, and the remainder for BESS. This aligns with TNB’s recent upsize in capex for RP4 (+29% from RP3). As a G7-certified contractor by TNB, CBHB is qualified to tender for national substation projects across all voltage levels. In addition, the rising demand for RE is expected to drive greater demand for 33kV-to-132kV substations, as large-scale RE projects typically require these substations to step up power before integrating it into the national grid. Backed by a proven track record in substation execution, we believe these developments present further growth opportunities for CBHB to capitalise on, expanding its market share in the industry.
Valuation & Recommendation
Initiation Coverage. We initiate coverage of CBHB with a BUY recommendation and a target price of RM0.54 by pegging 18.0x P/E ratio to FY26F EPS of 3.0 sen, along with a three-star ESG rating. We believe that the P/E multiple premium over general MEP peers is justified given (i) CBHB’s strong design-and-build capabilities for HV substations, (ii) robust supplier relationships that enables cost-efficient procurement, (iii) and long-standing client relationships, positioning the Group as the preferred contractor.CBHB’s share price slump over past two months, attributable to the rollout of DeepSeek and the AI Diffusion Framework, was an unwarranted overreaction. At the current share price (last close RM0.27), we believe it is a good opportunity for accumulation, as the stock trades at only 9x FY26 EPS, representing a 8% discount to the peers' weighted average PE of 9.8x.
Disclaimer
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Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of Apex Securities Berhad and are subject to change without notice. Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.
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