Investment Highlights

• We maintain our HOLD recommendation on Boilermech with a higher fair value of RM0.76/share (vs. RM0.65/share previously). Our fair value for Boilermech is based on an FY20F PE of 15x.

• We have revised Boilermech’s FY20F net profit upwards by 17.7% to account for a higher-than-expected pre-tax profit margin for the bioenergy division. We believe that low steel costs will drive the improvement in the bioenergy division’s pre-tax margin in FY20F.

• We have forecast a small 3% increase in the revenue of the bioenergy division (mainly manufacturing of boilers in palm oil mills) in FY20F. We think that some plantation companies in Malaysia and Indonesia may delay or reduce their capex for palm oil mills in light of weak CPO prices.

• Boilermech’s bioenergy order book improved by 2.8% to RM196.1mil in FY19 from RM190.7mil in FY18. Boilermech takes about a year to complete and deliver its boilers to customers.

• In its results announcement, Boilermech said that it is cautiously optimistic over its financial performance in FY20F.

• Boilermech’s net profit rose by 31.0% YoY to RM6.5mil in 1QFY20 underpinned by the bioenergy division.

• Revenue of the bioenergy unit improved by 11.5% YoY to RM53.5mil in 1QFY20 on the back of higher project deliveries. These projects were mainly in respect of repairs and refurbishment works.

• EBIT margin of the bioenergy division climbed to 15.6% in 1QFY20 from 13.9% in 1QFY19. Export sales accounted for 58% of the bioenergy division’s revenue in 1QFY20 compared with 61% in 1QFY19. Local customers made up the balance 42% of the revenue in 1QFY20.

• EBIT of the water treatment division improved to RM0.5mil in 1QFY20 from RM0.1mil in 1QFY19. EBIT margin of the division was 6.9% in 1QFY20 against 2.0% in 1QFY19.

• Bioenergy accounted for 94.4% of Boilermech’s 1QFY20 EBIT while the water treatment division made up the balance 5.6%.

• Boilermech’s balance sheet is healthy. Net cash stood at RM88.0mil as at end-June 2019 compared with RM89.2mil as at end-March. Gross borrowings amounted to RM12.7mil as at end-June 2019.

Source: AmInvest Research - 20 Aug 2019