Investment Highlights

• Maintain HOLD on Boilermech with a lower fair value of RM0.65/share (vs. RM0.82/share previously). Our fair value for Boilermech is based on an FY20F PE of 15x compared with 20x previously.

• Due to the declining outlook for the palm oil mill industry resulting from languishing CPO prices, we believe that Boilermech would no longer be trading at premium valuations.

• Boilermech’s FYE3/20F PE is 14.2x currently vs. CB Industrial Product Holding’s FYE12/19F basic PE of 10.2x. We believe that Boilermech’s PE is higher than CBIP as it has a strong market share in the boiler industry in Indonesia and Malaysia.

• Boilermech's 1HFY19 net profit was within our expectations.

• Boilermech’s net profit rose by 10.4% YoY to RM10.4mil in 1HFY19 underpinned by an increase in the delivery of projects by the bio-energy unit.

• The division’s revenue grew by 6.4% YoY to RM94.5mil in 1HFY19 supported by an increase in the order book.

• Export sales accounted for 61% of the bio-energy unit’s revenue in 1HFY19 (1HFY18: 54%).

• We believe that most of the overseas contracts are from Indonesia. Boilermech is one of the top three manufacturers of boilers in Indonesia.

• EBIT margin of the bio-energy division was 14.4% in 1HFY19 against 14.5% in 1HFY18.

• EBIT of the water treatment division rose from RM0.8mil in 1HFY18 to RM1.5mil in 1HFY19 on the back of higher project deliveries. EBIT margin of the unit improved from 6.4% in 1HFY18 to 9.4% in 1HFY19.

• Boilermech's balance sheet is healthy. Net cash fell from RM90.4mil as at end-June to RM73.5mil as at endSeptember 2018. The group’s gross borrowings stood at RM8.0mil as at end-September 2018.

Source: AmInvest Research - 23 Nov 2018