Investment Highlights

• We maintain our BUY recommendation 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 11.3x.

• Boilermech’s 9MFY20 results were within our expectations. Boilermech’s net profit rose by 12.8% QoQ to RM5.7mil in 3QFY20 underpinned by a higher completion of projects. 2H is usually a stronger period for earnings delivery. In FY19, 2H accounted for 61% of Boilermech’s net profit.

• Boilermech’s net profit improved by 5.6% YoY to RM17.2mil in 9MFY20 on the back of a higher order book. We believe that plantation companies are carrying more capex for palm oil mills as CPO prices have improved. It takes about a year to deliver boilers to palm oil mills.

• Revenue of the bioenergy division (mainly manufacturing of boilers for the palm industry) increased by 7.7% YoY to RM147.5mil while EBIT expanded by 10.0%.

• EBIT margin of the inched up to 15.2% in 9MFY20 from 14.9% in 9MFY19 due to cost-savings from lower operating expenses in 3QFY20.

• Bioenergy accounted for 93.0% of Boilermech’s EBIT in 9MFY20 while water treatment made up the balance 7%.

• We believe that most of Boilermech’s boiler contracts are awarded by overseas customers. Export sales accounted for 52% of the bioenergy division’s revenue in 9MFY20 (9MFY19: 60%) while local customers made up the balance 48% (9MFY19: 40%).

• Revenue of the water treatment division slid by 10.9% YoY to RM22.8mil in 9MFY20 while EBIT eased by 29.1% to RM1.7mil. EBIT margin was 7.4% in 9MFY20 compared with 9.3% in 9MFY19.

• Boilermech’s balance sheet is clean. Net cash stood at RM54.0mil as at end-December 2019 vs. RM51.0mil as at end-September. Gross borrowings stood at RM7.3mil as at end-December 2019.

Source: AmInvest Research - 25 Feb 2020