Investment Highlights

• We cut our FY19–20F earnings forecasts by 29% and 12% respectively, reduce our FV by 29% to RM0.61 (from RM0.87) but maintain our BUY call. Our new FV is based on 8x revised FY19F EPS, which is 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 the slight delay in: (1) the commencement of Eonmetall’s buildoperate-own-transfer (BOOT) palm fibre oil extraction (PFOE) project with FGV; and (2) the rollout of the Constructor racking system.

• During a recent meeting, Eonmetall guided for maiden profits from the operation of FGV’s BOOT PFOE plants to only come in during 4QFY19 (vs. 1QFY19 it guided previously). The maiden profits will come from the first three of the total six units. Meanwhile, Eonmetall expects the remaining three units to start operation in FY20 (vs. 2HFY19 it expected previously). These are mainly due to its inability to secure the sites due to the delays in the signing of land lease agreements.

• To recap, Eonmetall in 2018 entered into a BOOT arrangement with Felda Palm Industries, a 72%-owned subsidiary of FGV, that entails Eonmetall to construct, commission, operate and maintain six PFOE plants alongside six Felda Palm’s existing palm oil mills on a profit-sharing basis over 10 years. Upon the successful implementation of these six PFOE plants, the same arrangement may be extended to another four palm oil mills. Also to recap, we estimate that each plant will generate an annual turnover of RM4mil (2,000 tonnes of residual palm oil recovered at an average CPO price of RM2,000/tonne) and profits of about RM1mil after accounting for operating costs and depreciation.

• Meanwhile, the recognition of fabrication profits from six plants has not been affected with the first three units in FY18 and the remaining three units in FY19 (as the point of profit recognition is fabrication works of the plants in the yard). Also, to recap, we estimate that the plant, priced at RM8.8mil each, could generate RM2–3mil in terms of the one-off fabrication profits.

Source: AmInvest Research - 19 Mar 2019