• Maintain HOLD on Boilermech Holdings with an unchanged fair value of RM1.02/share. Our fair value implies a FY18F PE of 20x. Boilermech is currently trading at FY18F PE of 18.6x and FY19F PE of 17.7x.

• At first glance, Boilermech's 1QFY18 results appear to be below our expectations. However, we are keeping our earnings estimates as we expect order book and recognition of progress billings to pick up in the following financial quarters.

• In the results announcement, Boilermech said that its order book has improved and it is optimistic on the prospects in 2HFY18.

• The group's net profit shrank by 27.5% YoY to RM4.7mil in 1QFY18 as revenue eased by 26.4%. On a positive note, Boilermech's gross profit margin rose from 21.5% in 1QFY17 to 24.3% in 1QFY18.

• Turnover of the bio-energy division (mainly manufacturing of boilers) slid by 28.4% YoY to RM39.8mil in 1QFY18 while EBIT declined by 26.5% to RM6.3mil. EBIT margin of the bio-energy division edged up from 15.4% in 1QFY17 to 15.8% in 1QFY18. Export sales accounted for 56% of Boilermech's revenue in 1QFY18.

• We attribute the YoY fall in the revenue of the bio-energy division in 1QFY18 to a drop in order book. Plantation companies reduced capital expenditure on palm oil mills in the past year as palm oil production was poor. We believe that plantation companies are starting to increase capital expenditure again as CPO prices have risen.

• The water treatment division recorded an 8.1% YoY decline in revenue in 1QFY18 while EBIT was marginally lower at RM0.4mil in 1QFY18 vs. RM0.6mil in 1QFY17. EBIT margin of the water treatment unit was 6.6% in 1QFY18 compared with 9.5% in 1QFY17.

• Boilermech's balance sheet is clean. Net cash rose from RM55.8mil as at end-March to RM60.1mil as at end-June 2017. Gross borrowings amounted to a small RM8.5mil as at end-June 2017.

Source: AmInvest Research - 23 Aug 2017