What’s New

• We met Boilermech’s management and came back feeling neutral about the Group’s future prospects.

• Immediate outlook remains challenging. According to the management, FY18 is a challenging to the Group’s business as affected by slowdown in planting activities pursuant to the lower production yield. As the Group manufactures boilers mainly cater for palm oil mills, its immediate future outlook remains unexciting. However, the Group only foresees the plantation sector to recover in FY19.

Comments

• Lukewarm Bio-energy segment. The Bio-energy segment has been experienced a bumpy growth in the past few years. The planting activities in Peninsular Malaysia as well as Sabah and Sarawak have been quite dim recently due to more mature plants as compared to growing plants. Meanwhile, in Indonesia, activities were subdued no thanks to land, environmental and social issue as well as lower production yield. In conjunction with that, Bio-energy segmental revenue and operating profit declined 14.3% yoy and 16.7% yoy respectively during 9MFY18.

• Maintaining its commanding positions for local and overseas markets. The Group’s current market share for boiler is estimated at 60% for Malaysian market, whilst c.20%-30% in Indonesian market. Boilermech is one of the key boiler manufacturers as it is able to secure well-known clients such as IJM, KLK and Felda in Malaysia and Gudang Garam, Musim Mas, and Sinar Mas from Indonesia. The Group’s average selling price (ASP) is slightly premium from its peers with ASP/unit of RM3-4m. The Group’s current utilization rate is about 70% with 80-90 units’ production capacity per year. The Group expects yearly order book of RM250m-RM300m (excluding Water Treatment segment) with sales of 50-60 units of boilers for Malaysia and Indonesia.

• Banking on Water treatment division. As for 9MFY18, the Water treatment’s topline and bottomline expanded 7.6% yoy and 54.4% yoy respectively. This segment has secured orders from various industries, mainly from palm oil sector and other industries such as food and chemical. Moving forward, the Group envisages the segment to achieve 20% revenue growth in FY19 (against our forecast of 10% yoy revenue growth). To recap, the Group ventured into the water treatment business in March 2016 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. TEK projects include water treatment plant, biogas solution and membrane filtration. The Group could benefit from this acquisition since Malaysian Palm Oil Board (MPOB) has required that all palm oil mills must own biogas facilities in the future. Currently, most of the palm oil mills in Sarawak possess biogas facilities in order to maintain ‘green environment’.
• Export sales could further expand in the near term. For 9MFY18, exports sales for both segments accounted for 53.6% of total sales. These were mainly contributed by its traditional market, Indonesia as well as other new markets such as Thailand, Cambodia, Philippines and Africa. We believe the exports sales could expand further as the Group will put in a concerted effort in propelling the growths for both of its bio-energy and water treatment segments.
• Expansion plan on Pulau Indah land remains idle. The Group decides to put on hold for its expansion plan in its land in Pulau Indah Industrial Park, Klang which is initially targeted for a new manufacturing plant and warehouse as well as expansion of other bio-energy system business. Currently, the Group focuses on conserving cash, which will be used for any potential acquisition in either Malaysia or Indonesia should the opportunity arises.

Earnings Outlook

• We tweak down our earnings forecasts for FY18F and FY19F by 6.5% and 6.7% respectively on the back of lower margin and order book due to low production yield resulted in lower investment capacity from palm oil millers. Still, we expect FY19 net earnings to grow by 19.6% yoy. Also, we take this opportunity to introduce our net earnings forecast for FY20 (+4.6%yoy growth). Besides, the Group’s net profit margin is expected to remain steady around 7%-9% in line with its strategy of improving order book for its Water treatment segment as well as Bio-energy segment.

Valuation/Recommendation

• Maintained HOLD call for Boilermech with a lower target price of RM0.77 (previously RM0.82) following our earning downgrade. Our fair value is based on 19x FY2019F PE which is close to its 3-year historical average PE.

Source: JF Apex Securities Research - 18 May 2018