Investment Highlights

• We initiate coverage on Boilermech Holdings Berhad (Boilermech) with a HOLD call and a target price of RM0.91, based on 19x FY2018F PE. Boilermech is a manufacturing company which designs and manufactures boilers for the palm oil milling and agricultural-based processing industries.

• Established track record. Boilermech was incorporated in 2005 and has produced more than 400 boilers over a decade. Consequently, the Group became a leading player in the palm oil mill boiler industry in the Malaysian and Indonesian markets. With a strong track record established by the Group, Boilermech is able to secure well known bluechip clients such as KLK and IJM Plantation in Malaysia as well as Wilmar International and Musim Mas Group in Indonesia. We estimate the Group’s market share currently stands at 50% for Malaysia and 20%-30% for Indonesia.

• High quality boilers with different specifications. Boilermech produces high quality boilers with different types of variants to cater to different customer needs. The Group offers three types of boilers with different graters, namely vibrating grate, reciprocating grate and fixed grate boilers. Thus, customers can select the boiler type that suits their best needs. Generally, the fixed grate boiler is the most popular type as it renders the most effective and convenient features.
• Anticipating strong demand from overseas market. Most of Boilermech’s revenues are derived from Malaysia and Indonesia. In order to reduce the reliance on these traditional markets, the Group expanded their Bio-energy segment’s reach to Thailand, Cambodia, Philippines, Africa, Papua New Guinea and South America. This resulted in improvement of revenue from other countries from 16.2% in 2016 to 62.7% in 2017. We foresee revenues from these countries to continue increasing in 2018 and 2019 as we believe the Group will put in a concerted effort to execute marketing strategies in these countries.
• Venturing into biogas and water treatment business. In March 2016, the group ventured into the water treatment business through the acquisition of a 60.2% equity interest in Teknologi Enviro-Kimia (M) Sdn Bhd (“TEK”), a total water management company based in Kuching, Sarawak. Acquiring TEK is a stepping stone for Boilermech as it stands to benefit from Malaysia Palm Oil Board (MPOB)’s requirement for every palm oil mill to have a biogas system. In conjunction with that, the water treatment division was able to generate revenue and pre-tax profit of RM29m and RM3.1m respectively in FY17. However, MPOB’s requirement may not be fully adopted immediately as the cost to develop the facilities is still high.
• Led by experienced management team who has over 30 years of experience in the palm oil mill industry. Boilermech is led by an experienced management team. With the vast experience, knowledge, leadership, technical know-how and strong business contacts within the palm oil industry, this will enable Boilermech to grow further in the future. We opine that the prevailing headwinds and adverse market conditions are only temporary and the management will drive the company going forward.
• Earnings rebound. Moving forward, we envisage the Group’s revenue and headline net profit could back into a growth trajectory as more oil palm trees coming into mature, not forgetting after-sales services which will continue to brighten the Group’s businesses. We expect the Group’s top line to grow 7.7% in FY18F and 10.1% for FY19F as well as rising bottom line by 9.7% and 10.1% in FY18F and FY19F respectively. Besides, we also foresee that its water treatment division will continue to generate earnings and secure more contracts following increasing environmental concerns and growing demand for clean water.
• Expansion plan on Pulau Indah land on hold. The Group decides to defer its expansion plan on its land in Pulau Indah Industrial Park, Klang until a more appropriate time. The Group is currently focusing to improve its cash reserve, which will be used for any business opportunities in the near future.

Earnings Outlook

• We estimate Group’s net earnings in FY2018F and FY2019F to grow by respective +9.7% and +10.1%, underpinned by higher revenue (FY2018F: +7.7% y-o-y; FY2019F: +10.1% y-o-y). Furthermore, the Group’s net profit margin is expected to remain steady around 9%-10% in line with its strategy of improving order book from both Bio-energy segment as well as Water treatment segment, coupled with extending its geographical reach apart from existing traditional business markets.

Valuation/Recommendation

• We initiate coverage on Boilermech with a HOLD call and a target price of RM0.91, based on 19x 2018F PE. The PER assigned for valuation is close to its 3-year historical average PE. Whilst we favour the Group for its resilient fundamental, we reckon that current share price is fully valued with limited upside against our fair value.

Source: JF Apex Securities Research - 17 Oct 2017