Investment Highlights

• We cut our FY18F earnings forecasts by 38%, reduce our FV by 5% to RM0.87 (from RM0.92) but maintain our BUY call. Our FV is based on 8x revised FY19F EPS (we have rolled forward our valuation base year from FY18F), and at a discount to the manufacturing sector’s average 1-year forward PE of 10–11x to reflect Eonmetall’s relatively small market capitalisation.

• The earnings downgrade is largely to reflect Eonmetall’s buildoperate-own-transfer (BOOT) palm fibre oil extraction (PFOE) project with FGV that has only started recently vs. our previous assumption of early FY18F.

• To recap, Eonmetall on 4 October 2018 finally entered into a BOOT arrangement with Felda Palm Industries (Felda Palm), a 72%-owned subsidiary of FGV, that entails Eonmetall to construct, commission, operate and maintain a PFOE plant each alongside six Felda Palm’s existing palm oil mills on a profitsharing basis over 10 years. Upon successful implementation of these six PFOE plants, the same arrangement may be extended to another four palm oil mills owned by Felda Palm.

• During a recent meeting, Eonmetall guided for the following: 1. Profits from the fabrication of the first three plants are likely to be recognised in FY18F, with the remaining three units in in FY19F. We estimate that the plant, priced at RM8.8mil each, could generate RM2-3mil in terms of the one-off fabrication profits; 2. Profits from the operation of the plants are likely to start coming in from 1QFY19F (first two units), 2QFY19F (another two units) and 2HFY19F (the last two units). We estimate that each plant will generate annual turnover of RM4.2mil (2,000 tonnes of residual palm oil recovered at an average CPO price of RM2,100/tonne) and profits of RM1mil after accounting for operating cost and depreciation.

• We have reflected the above in our forecasts. In addition, we also assume that FGV will opt for working with Eonmetall on another four plants in FY20F, as per the agreement.

Source: AmInvest Research - 19 Oct 2018