Investment Highlights

• Maintain HOLD on Boilermech with an unchanged fair value of RM0.82/share. Our fair value for Boilermech is based on an FY19F PE of 20x.

• Boilermech is currently trading at a FYE3/19F PE of 17.8x compared with CB Industrial Product Holding’s FYE12/18F basic PE of 9.1x. We reckon that Boilermech’s PE valuation is at a premium due to its strong market share in the palm boiler industry in Indonesia and Malaysia.

• We consider Boilermech's 1QFY19 net profit to be within our expectations as recognition of progress billings is expected to pick up in the following quarters.

• The group’s net profit grew by 5.7% YoY to RM4.9mil in 1QFY19 due to an increase in the delivery of projects by the bioenergy division.

• Revenue of the bioenergy unit, which manufactures and sells boilers, improved by 20.7% from RM39.8mil in 1QFY18 to RM48.0mil in 1QFY19. In terms of efficiency however, EBIT margin of the division shrank from 15.8% in 1QFY18 to 13.9% in 1QFY19. We believe that this was partly due to a loss on derivatives of RM3.4mil.

• Export sales accounted for 61% of Boilermech’s revenue in 1QFY19 vs. 56% in 1QFY18. We reckon that most of Boilermech’s boiler contracts are from Indonesia.

• EBIT of the water treatment division inched down from RM0.4mil in 1QFY18 to RM0.1mil in 1QFY19 dragged by higher operating expenses. As a result, EBIT margin of the unit slid from 6.6% in 1QFY18 to 2.0% in 1QFY19.

• Going forward, we reckon that the palm oil mill industry is facing challenging times. We believe that plantation companies are delaying capital expenditure on palm oil mills to conserve cash due to the fall in CPO prices.

• Boilermech's balance sheet is clean. Net cash climbed from RM80.5mil as at end-March to RM90.4mil as at endJune 2018. The group’s gross borrowings stood at RM8.0mil as at end-June 2018.

Source: AmInvest Research - 24 Aug 2018