Highlights

Background. Boilermech is one of the largest boiler manufacturers in Malaysia, which serves primarily, the palm oil milling industry, as well as other agricultural based processing industries, such as sugar milling, rubber-based manufacturing, and food processing.

Earnings to remain strong. Since FY10, Boilermech has been registering revenue and net profit CAGR of 18.8% and 24.4% respectively (see Figures 1-2). We believe the strong earnings growth will sustain for the next few years, underpinned by: (1) Its current orderbook of >RM300m (or >1.8x of FY13 revenue, which is sufficient to keep the company busy for the next 18 months); (2) Increasing harvesting areas of oil palm plantations (which will sustain demand for boilers); and (3) Management’s ongoing efforts to expand its manufacturing capacity.

Set eyes on renewable energy segment. The oil palm plantation sector has been Boilermech’s bread and butter, which currently accounts for 90% of the company’s revenue. The company has plan to expand its revenue base to other segments, in particularly the biogas and biomass power generation segments, which has tremendous demand growth potential in Malaysia given the increasing natural gas price (which has already resulted in manufacturers increasingly seeking the use of alternative energy sources).

Renewable energy segment aside, the company is also aiming to double its contribution from the service and repair segment (from 5% currently) within the next three years.

Strong balance sheet. As at 31 Dec 2013, the company had net cash and net cash per share of RM70.9m and 27.5 sen, respectively.

Earnings Forecasts

We are projecting Boilermech’s FY03/14-16 earnings to grow at 3-year CAGR of 17%, underpinned by its existing orderbook of >RM300m, buoyant demand outlook for boiler, as well as the management’s ongoing efforts to gradually expand manufacturing capacity.

Catalysts

• Successfully expanding its revenue base to other segments, in particularly, the renewable energy sector.
• Doubling of service and repair contribution from 5% currently.

Risks

• Inability to replenish contract orderbook.
• Inability to pass on higher cost of raw materials to customers.

Rating

Not Rated

Positives – (1) Proven track record; (2) Positive demand outlook for boilers; and (3) Strong balance sheet.

Negatives – Pricey valuations and relatively low liquidity.

Valuation

Excluding its net cash per share of 27.5 sen, Boilermech is trading at 19x FY03/16 EPS. While it seems that current share price has already priced in the strong demand outlook for boilers in the palm oil segment, we believe share price will likely be re-rated should the company succeed in expanding its revenue base to other segments, especially the renewable energy sector.

Source: Hong Leong Investment Bank Research - 9 Apr 2014