Investment Highlights

• Maintain HOLD on Boilermech with an unchanged fair value of RM0.65/share. Our fair value for Boilermech is based on an FY20F PE of 15x.

• Boilermech is currently trading at an FYE3/20F PE of 13.7x compared with CB Industrial Product Holdings’ basic FYE12/19F PE of 10.8x. We believe that Boilermech is trading at a premium valuation as it has a strong market share in the boiler industry in Indonesia and Malaysia.

• Boilermech's 9MFY19 net profit was within our expectations.

• Boilermech’s net profit rose by 12.3% to RM16.3mil in 9MFY19 from RM14.5mil in 9MFY18 on the back of projects, which command higher margins and increased contribution from the water treatment division. Group revenue inched up a mere 3% YoY to RM162.5mil in 9MFY19.

• Revenue of the bioenergy division was flat at RM137mil in 9MFY19. In a Bursa Malaysia announcement, Boilermech said that it continues to face a challenging operating environment as the order book for the current financial year is lower than last financial year.

• Export sales accounted for 60% of the bioenergy unit’s revenue in 9MFY19 (9MFY18: 54%). We believe that most of the overseas contracts are from Indonesia. Boilermech is one of the top three manufacturers of palm boilers in Indonesia.

• EBIT margin of the bioenergy division edged up to 14.9% in 9MFY19 from 13.4% in 9MFY18.

• EBIT of the water treatment division rose to RM2.4mil in 9MFY19 from RM2.0mil in 9MFY18 supported by the delivery of projects. EBIT margin of the unit slid to 9.3% in 9MFY19 from 9.5% in 9MFY18.

• Boilermech's balance sheet is clean. Net cash amounted to RM81.5mil as at end-December 2018 compared with RM73.5mil as at end-September. The group’s gross borrowings stood at RM8.1mil as at end-December 2018.

Source: AmInvest Research - 22 Feb 2019