Investment Highlights

• We are upgrading our recommendation on Boilermech to BUY from HOLD as its share price has dropped sharply below our fair value of RM0.76/share. Our fair value for Boilermech is based on an FY20F PE of 15x. Boilermech is currently trading at an attractive FY21F PE of 11.7x.

• Boilermech’s 1HFY20 results were within our expectations. We expect earnings to be stronger in 2HFY20 on the back of higher project deliveries. 2H accounted for 61% of Boilermech’s net profit in FY19.

• Boilermech’s net profit rose by 10.0% YoY to RM11.5mil in 1HFY20 underpinned by a higher order book and increased project deliveries by the bioenergy division (mainly manufacturing of boilers for the palm oil industry).

• Bioenergy accounted for 91.1% of Boilermech’s EBIT in 1HFY20 while the water treatment division made up the balance 8.9%.

• Revenue of the bioenergy division improved by 6.8% to RM101.0mil in 1HFY20 from RM94.5mil in 1HFY19 on the back of a higher order book. Boilermech usually takes about a year to complete and deliver its boilers to customers.

• EBIT margin edged up to 14.8% in 1HFY20 from 14.4% in 1HFY19. We believe that the YoY enhancement in EBIT margin in 1HFY20 was due to lower cost of raw materials.

• We reckon that most of Boilermech’s boiler contracts are awarded by overseas customers. Export sales accounted for 57% of the bioenergy division’s revenue in 1HFY20 (1HFY19: 61%) while local customers made up the balance 43% (1HFY19: 39%).

• Revenue of the water treatment division improved by 1.6% YoY to RM16.3mil in 1HFY20. EBIT margin of the division edged down to 9.0% in 1HFY20 from 9.4% in 1HFY19. The division has grown to a pre-tax of RM4.5mil in FY19 from a small RM2.7mil in FY17.

• Boilermech’s balance sheet is still healthy. Net cash stood at RM51.0mil as at end-September vs. RM88.0mil as at endJune. Gross borrowings stood at RM7.5mil as at endSeptember 2019.

Source: AmInvest Research - 22 Nov 2019