Investment Highlights

• We are upgrading our recommendation on Boilermech Holdings from HOLD to BUY. Due to the sharp drop in its share price, our fair value of RM1.02/share now implies an upside of 22.2%. Our fair value is based on an FY19F PE of 20x.

• Boilermech is currently trading at FY18F PE of 17.3x and FY19F PE of 16.4x. We forecast Boilermech's dividend yields at 1.8% each for FY18F and FY19F.

• Although Boilermech's 1HFY18 results appear to be below expectations, we are maintaining our earnings forecast. We expect Boilermech's order book and recognition of progress billings to pick up in 2HFY18.

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

• We think that Boilermech would be able to secure more contracts as CPO production is rising and plantation companies are increasing their capital expenditure again. CPO prices have been consistently hovering between RM2,600/tonne and RM2,800/tonne recently.

• Boilermech's net profit declined by 6.4% from RM10.1mil in 1HFY17 to RM9.5mil in 1HFY18. Revenue slid by 12.9% YoY to RM101.2mil in 1HFY18. In spite of the fall in revenue, gross profit margin rose from 19.7% in 1HFY17 to 23.4% in 1HFY18 due to a 16.9% drop in the cost of sales.

• Revenue of the bioenergy division (mainly manufacturing of boilers) fell by 31.3% from RM129.2mil in 1HFY17 to RM88.8mil in 1HFY18. EBIT shrank by 51.1% YoY to RM12.9mil in 1HFY18.

• We believe that the YoY fall in the bioenergy division's revenue in 1HFY18 was due to a decline in the value of contracts secured in FY17.

• Export sales accounted for 53.6% of Boilermech's revenue in 1HFY18. Most of Boilermech's overseas revenue comes from Indonesia. We believe that Boilermech is among the top three manufacturers of boilers in Indonesia.

• Boilermech's balance sheet is clean. Net cash edged up from RM60.1mil as at end-June to RM70.5mil as at endSeptember 2017. Gross borrowings were small at RM8.4mil as at end-September 2017.

Source: AmInvest Research - 23 Nov 2017