Investment Highlights

• We are downgrading our recommendation on Boilermech to SELL from HOLD as its share price has surpassed our fair value of RM0.67/share. We believe that the potential improvement in Boilermech’s prospects resulting from the relaxation of the movement control order (MCO) has already been reflected in the share price.

• Our fair value of RM0.67 is based on an FY21F PE of 15x. Boilermech is currently trading at an FY21F PE of 19.2x.

• Boilermech’s 1HFY21 results were within our expectations. We expect the group’s net profit to improve in 2HFY21 on the back of the completion and delivery of projects.

• Boilermech’s net profit dived by 27.0% YoY to RM8.4mil in 1HFY21 as the MCO affected the completion and delivery of boilers in 1Q. Group revenue shrank by 17.8% YoY to RM96.4mil in 1HFY21 as turnover of the bioenergy division (mainly manufacturing of boilers) dropped by 16.9%.

• The bioenergy division recorded an EBIT margin of 14.5% in 1HFY21 vs. 14.8% in 1HFY20. We attribute the small erosion in EBIT margin in 1HFY21 to the drop in revenue while at the same time, fixed costs such as salaries were still being incurred.

• Comparing 2QFY21 against 1QFY21, Boilermech’s net profit improved to RM6.0mil from RM2.3mil. This was due to improved project deliveries and contribution from the solar business. The RM2.5mil acquisition of 60% of TERA VA Sdn Bhd was completed in May 2020. Boilermech’s water treatment division also benefited from a reversal of doubtful debts of RM0.7mil in 2QFY21.

• Most of Boilermech’s revenue came from local customers in 1HFY21. Due to travel restrictions, we reckon that Boilermech was unable to travel to Indonesia to bid for projects. We also believe that Boilermech’s business in Indonesia was affected by the lockdown in Jakarta. Boilermech is one of the largest producers of boilers in Indonesia.

• Local customers accounted for 64.5% of Boilermech’s revenue in 1HFY21 (1HFY20: 43.4%) while export customers made up the balance 35.5% (1HFY20: 56.6%).

• Revenue of the water treatment division slid by 22.7% YoY to RM12.6mil in 1HFY21 as the MCO restricted economic activities in 1QFY21. However, EBIT rose marginally to RM1.7mil in 1HFY21 from RM1.5mil in 1HFY20 partly on the back of a reversal of doubtful debts in 2QFY21. EBIT margin of the unit rose to 13.8% in 1HFY21 from 9.0% in 1HFY20.

Source: AmInvest Research - 25 Nov 2020