Result

• Boilermech Holdings Berhad (Boilermech) recorded a net profit of RM5.5m in 2QFY19, which elevated 11.8% qoq and 14.9% yoy. Meanwhile, revenue increased 3.4% qoq and slightly improved 0.7% yoy. The encouraging results for both qoq and yoy were underpinned by better performance in Bio energy segment as well as Water treatment segment.

• Within expectations. The Group’s 6MFY19 net profit of RM10.4m was within ours and consensus expectation, meeting 47.9% and 47.8% of the full year net earnings forecasts respectively.

Comment

• Higher sales in Water treatment division lifted QoQ performance. The Group’s revenue and PBT surged 3.4% qoq and 21.2% qoq respectively in 2QFY19, thanks to higher project delivery and sales under Water treatment division. Water treatment division’s revenue inched up 52.9% qoq while PBT surged 437.3% qoq. Besides, Bio-energy division posted a higher PBT which was up 2.6% yoy despite lower revenue, -3.1% qoq.

• Stellar YoY buoyed by better margins from both segments. Despite lower revenue in Bio-energy division (- 5.0% yoy), PBT margin improved by +1.3 ppts. Meanwhile, Water treatment segment’s revenue and PBT margin increased +41.7% yoy and +8.1 ppts respectively. As such, Groups’ revenue and PBT margin increased 0.7% yoy and +2.8 ppts respectively.

• Encouraging 1HFY19. Boilermech’s revenue surged 9.2% yoy to RM110.5m mainly underpinned by higher revenue in both segments (Bio-energy: +7.0% yoy and Water treatment: +23.8% yoy). Besides, the Group’s operating profit margin expanded +0.7 ppts due to better margin in Water treatment segment. Overall, 1HFY19 performance was buoyed by better project delivery as compared to 1HFY18.

• Export sales dominated overall revenue. Exports sales accounted for 61% of Boilermech’s revenue in 1HFY19 (vs 1HFY18: 54%). We believe most of the contracts secured mainly from Indonesia.

• Outlook remains challenging. Looking forward, the Group is cautious on its business performance for the rest of the financial year following lower order book secured in 1HFY19. Besides, we expect the Group continues to face some headwinds under the palm oil industry in relation to lower planting activities for Malaysian market, lower production yield for Indonesian market as well as environmental and social issues which affect planters’ upstream activities.

Earnings Outlook

• We retain our earnings forecasts for FY19 and FY20 at RM21.8m and RM24.2m respectively.

Valuation/Recommendation

• Maintain HOLD call for Boilermech with a lower target price of RM0.68 (from RM0.77) as we lower our PE valuation to 16x FY19F EPS (from 17.6x) to better reflect prevailing challenging outlook in plantation sector as affected by weaker CPO price. Our valuation is slightly higher than its - 1SD of mean of 15.6x.

Source: JF Apex Securities Research - 23 Nov 2018