Investment Highlights

• We maintain a BUY on Boilermech with an unchanged 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 undemanding FY21F PE of 11.9x.

• We think that Boilermech would be a beneficiary of the current uptick in CPO prices. We reckon that plantation companies in Indonesia would be incentivised to invest in palm oil mills as CPO prices have risen. Boiler is an integral component of a palm oil mill.

• In the past when CPO prices were low, plantation companies reduced their capital expenditure unless it was really necessary. As such, some companies delayed the construction of palm oil mills. Generally, a palm oil mill is required when there are mature areas of 7,000ha to 10,000ha.

• We forecast revenue of Boilermech’s bioenergy systems (mainly construction of boilers) division to improve by 3% in FY20F vs. 2.8% in FY19 as order book recovers. A boiler takes about a year to be completed.

• From FY16 to FY18, revenue of the bioenergy systems division fell by 7.3%, 19.1% and 8.4% each as plantation companies delayed their capital expenditure on palm oil mills.

• We believe that most of Boilermech’s contracts would come from Indonesia. In 2019, Boilermech acquired three parcels of adjoining land measuring up to 30,000 sq m in East Gresik so that the group can set up a manufacturing plant.

• Overseas markets accounted for 57% of Boilermech’s revenue in 1HFY20 while the local market made up the balance 43%.

• There has not been a major expansion in new plantings of oil palm in Malaysia in recent years as most of the landbank had already been planted. The exception is Sarawak. According to the MPOB, planted areas in Sarawak climbed by 24.5% to 1.57mil ha in 2018 from 1.26mil ha in 2014.

• Boilermech’s balance sheet is healthy. Net cash stood at RM90.1mil as at end-March 2019. Gross borrowings amounted to RM7.2bil.

Source: AmInvest Research - 20 Jan 2020