Investment Highlights

• We downgrade Boilermech to HOLD from BUY with a lower fair value of RM0.67/share vs. RM0.76/share previously. We have reduced Boilermech’s FY21F net profit by 11.8% to account for a lower order book. We think that plantation companies would defer their capital expenditure due to the uncertain economic outlook.

• Our fair value for Boilermech is based on a FY21F PE of 15x. Boilermech is currently trading at a FY21F PE of 14.0x.

• Altough Boilermech’s 1QFY21 results were poor, we expect earnings to pick up in the following quarters as the group accelerates the delivery and completion of its boiler and water treatment order book.

• Boilermech’s 1QFY21 results were below our original expectations as revenue declined on lower project deliveries. This was due to the Movement Control Order in 1QFY21 resulting from the Covid-19 outbreak.

• Boilermech’s net profit declined by 63.8% YoY to RM2.3mil in 1QFY21 as project works slowed. Group revenue slid by 47.3% to RM32.0mil in 1QFY21 from RM60.8mil in 1QFY20 mainly due to a 48.8% drop in sales of the bioenergy division.

• Revenue of the bioenergy division (mainly manufacturing of boilers for the palm industry) slid by 48.8% YoY to RM27.4mil in 1QFY21 while EBIT shrank by 60.9%.

• EBIT margin of the bioenergy unit dived to 11.9% in 1QFY21 from 15.6% in 1QFY20 as workers still need to be paid even though there were minimal project billings.

• Bioenergy accounted for 90.9% of Boilermech’s EBIT in 1QFY21 while water treatment made up the balance 9.1%.

• Most of Boilermech’s revenue came from local customers in 1QFY21 instead of overseas customers. Export sales accounted for only 42% of the bioenergy division’s revenue in 1QFY21 (1QFY20: 58%) while local customers made up the larger 58% (1QFY20: 42%).

• Revenue of the water treatment division declined by 36.1% YoY to RM4.6mil in 1QFY21 while EBIT eased by 36.9% to RM0.3mil. EBIT margin was 6.8% in 1QFY21 compared with 6.9% in 1QFY20.

Source: AmInvest Research - 13 Aug 2020