Investment Highlights

• We maintain our BUY and FV of RM0.97 but raise our FY19F earnings by 18% (earnings for FY17F & FY18F remain unchanged), following a recent meeting with Eonmetall Group. Our FV is based on 8x FY18F EPS of 12.1 sen, a discount to the manufacturing sector’s average 1-year forward PE of 10-11x to reflect Eonmetall’s relatively small market capitalization of less than RM150mil.

• Our FY19F earnings upgrade forecast is premised upon the positive development in Eonmetall. For machinery and equipment, Eonmetall is currently in the final stage of negotiation with a public-listed company for the construction of several PFOE plants on a build-operatetransfer (BOT) basis and expect to deliver the PFOE plants as early 1HFY18. In addition, Eonmetall may secure additional two PFOE plants on an outright purchase basis which are expected to be delivered as early 1HFY18.

• In addition, Eonmetall’s steel and trading division earnings are expected to grow stronger in 2HFY18 through is steel racking business. The newly formed subsidiary of Eonmetall, Constructor Asia Sdn Bhd (CASB) was incorporated recently to become contract manufacturer and distributor of the steel racking solution (within the Asia Pacific region ex-Middle East) under the product flagship of Constructor from Europe. While Constructor products are predominantly focused on the Europe and Middle East regions, Constructor plans to expand its racking solution business to the Asia Pacific region via collaboration with CASB, whereby Construction would confer licensing rights to CASB to manufacture and distribute its products. CASB is expected to begin its operation as early as 2HFY18 with an estimated annual revenue of RM50mil.

• Eonmetall’s plans for overseas expansion are progressing well whereby: 1) a JV for steel racking manufacturing plant in Bangladesh to cater for steel racking products in the MENA & South Asia regions will commence by 1HFY18; and 2) a JV for steel processing plant in the UAE to cater for downstream steel products in MENA region will commence by 1HFY18.

• Nevertheless, Eonmetall guided for a subdued quarter in 3QFY17 due to the lower sales recognition from its machinery and equipment (i.e. metalwork machine and solvent plant) and steel and trading (i.e. steel racking). Notwithstanding that, we believe Eonmetall would deliver resilient earnings in FY17F as its 1HFY17 net profit came in at 73% due to lumpy billings.

• We also like Eonmetall for the growing acceptance by palm oil millers in Malaysia and Indonesia for its oil extraction plants. Eonmetall enjoys good margins for these oil extraction plants in the absence of competition, coupled with the in-sourcing of inputs (steel products and metalwork machinery) used in the fabrication of these plants.

Source: AmInvest Research - 8 Nov 2017