Investment Highlights

• We believe that Boilermech’s shareholders should accept QL Resources’ take-over offer of RM0.95/share. Our fair value for Boilermech is RM0.67/share, which is based on a FY21F PE of 15x.

• We reckon that there is limited upside to Boilermech’s share price as the group’s valuations are expensive.

• Boilermech is currently trading at a FY21F PE of 21.2x and FY22F PE of 20.7x. In addition, the general offer (GO) price of RM0.95/share is close to Boilermech’s 52-week high of RM0.965/share.

• QL said that it intends to maintain the listing status of Boilermech.

• We believe that prospects for the palm boiler industry are unexciting. Capex for palm oil mills is expected to decline in the long term as plantation companies in Indonesia have been reducing their new plantings of oil palm.

• Also, we reckon that plantation companies are deferring plans to build palm oil mills unless absolutely necessary. Although CPO prices are high currently, plantation companies are keeping capex low to conserve cash.

• Although Boilermech bought a solar company in May 2020, we believe that it would take time for earnings contribution to be significant.

• QL was also obliged to extend a conditional mandatory general offer to the shareholders of Boilermech after its stake in the group rose to 48.15% from 44.15%.

• QL’s stake in Boilermech rose as it acquired 20.6mil shares representing a 4.0% stake from Leong Yew Cheong for RM19.6mil cash or RM0.95/share. Leong is the managing director of Boilermech and a substantial shareholder.

• Assuming a 100% acceptance rate, we estimate that it would cost about RM221.6mil for QL to privatise Boilermech (excluding Leong’s stake). QL had gross cash of RM446.5mil as at end-September 2020.

Source: AmInvest Research - 4 Dec 2020