Investment Highlights

• We maintain our BUY call, forecasts and FV of RM0.78 based on 8x FY17F EPS of 9.7 sen, at a discount to the manufacturing sector’s average 1-year forward PE of 10-11x to reflect Eonmetall Group’s (EG) relatively small market capitalisation of less than RM150mil.

• EG’s 1QFY17 net profit came in at 38% of our and consensus full-year forecasts respectively. However, we consider the results within expectations as EG's quarterly earnings could be volatile due to lumpy profits recognised from palm fibre oil extraction (PFOE) plant projects, depending on progress.

• EG reported net profit of RM6.3mil in 1QFY17 as compared to RM11.4mil for 1QFY16 and net loss of RM3.2mil in 4QFY16 due to:
  • Machinery & Equipment division (including PFOE plant project) – This segment recorded revenue of RM13.8mil as compared to RM20.5mil for 1QFY16 and RM9.4mil for 4QFY16. 1QFY16 was an exceptionally strong quarter, while 4Q16 was a washout.
  • Steel Product & Trading division – Revenue rose by 56% YoY and marginally dropped QoQ by 2%. However, PBT for 1QFY17 was lower YoY due to the low margin generated from the flat steel coil processing business.
     
• We believe earnings will continue to improve further in the coming quarters of FY17 mainly from the Machinery and Equipment division. This is due to the current ongoing negotiation between EG and a publicly listed company to build several PFOE plants on a build-operate-transfer (BOT) basis. It is also in talks with an existing client (a government agency) for the order of its second PFOE plant, and a new customer (a publicly listed plantation company) for the contract of its first ever PFOE plant.

• We like EG for the growing acceptance by palm oil millers in Malaysia and Indonesia for its oil extraction plants. EG enjoys good margins for these oil extraction plants in the absence of competition, coupled with the insourcing of inputs (steel products and metalwork machinery) used in the fabrication of these plants. Generally, steel products, metalwork machinery and oil extraction plants, contribute about a third to EG group earnings each.

Source: AmInvest Research - 26 May 2017