Investment Highlights

• We are downgrading Boilermech Holdings from BUY to HOLD with a lower fair value of RM0.82/share (vs. RM1.02/share previously). Our fair value is based on an FY19F PE of 20x.

• We have reduced Boilermech's FY18F net profit by 20.6% to account for a lower revenue. Boilermech's 9MFY18 results were below our expectation due to a weaker-thanexpected order book. We have also cut Boilermech's FY19F net earnings by 19.8%.

• Due to our earnings revision, Boilermech's FY18F PE is now 20.4x while its FY19F PE is 19.1x. Dividend yield is estimated to be 1.3% in FY18F and 1.9% in FY19F.

• Comparing 9MFY18 against 9MFY17, EBIT of the bioenergy division slid by 16.7% to RM18.3mil. Due to weak CPO output in 2016, there was poor demand for palm oil mills. This resulted in a fall in the order book last year, which affected Boilermech's earnings this financial year. EBIT margin of the division was 13.4% in 9MFY18 vs. 13.8% in 9MFY17.

• On a quarterly basis, revenue of the bio-energy segment, shrank by 2.2% to RM47.9mil in 3QFY18. EBIT declined from RM6.6mil in 2QFY18 to RM5.5mil in 3QFY18. EBIT margin slid from 13.5% in 2QFY18 to 11.4% in 3QFY18.

• We believe that the bio-energy segment may have been affected by the appreciation of the MYR against the USD in 3QFY18 as the group's overseas contracts are denominated in USD.

• Export sales accounted for 53.6% of Boilermech's revenue in 9MFY18. Most of Boilermech's overseas revenue comes from Indonesia. We believe that Boilermech is among the top three manufacturers of boilers in Indonesia.

• Comparing 3QFY18 against 2QFY18, Boilermech's net profit improved by 4.2% to RM5.0mil underpinned mainly by the water treatment segment. EBIT of the water treatment unit climbed from RM0.4mil in 2QFY18 to RM1.2mil in 3QFY18 as a result of an increase in order book.

• Boilermech's balance sheet is healthy. Net cash rose from RM70.5mil as at end-September to RM77.8mil as at endDecember 2017.

Source: AmInvest Research - 14 Feb 2018