What’s New

• Brighter outlook. We met Boilermech’s management recently and came back feeling slightly positive on the Group’s future prospects. To recap, Boilermech registered a stellar growth in which revenue and net profit grew +3.0% yoy and +12.3% yoy respectively in 9MFY19. As for full year FY19, the Group expects overall performance will be slightly better from the previous year, banking on higher order book from both Bio-energy and Water treatment segments amid recovery in plantation industry.

• Outlook remains intact. Looking forward, the Group’s business will be propelled by higher demand of boiler in Indonesian market following strong expansion of plantation business in Indonesia as compared to Malaysia. Likewise, business from Water treatment also expected to show a robust growth going forward underpinned by strong demand from multi-industries and strong market positions in Sabah and Sarawak.

• Steady order book. Current order book secured for both segments is close to RM170m-RM220m, which is on par with its FY18’s revenue. Looking forward, the group expects to replenish its order book to about a year for FY20F mainly stemming from Indonesian market.

Comments

• Revival of Bio-energy segment. This segment has been experienced a challenging growth in the past few years due to uninspiring market condition and lower production in palm oil industry which eventually affected the demand for boilers. However, as for 9MFY19, Bio-energy segment has regained its momentum by improving +0.2% yoy for revenue while operating profit was up by +11.3% yoy. The Bio-energy segment’s revenue was backed by higher sales in standard biomass boiler which mainly caters for palm oil mills and other agricultural based processing industries. The Group’s current market share for boiler is estimated at 50%-60% for Malaysian market, whilst c.25%-30% in Indonesian market. The boilers are priced at slight premium from its peers with ASP/unit of RM3-4m. The Group maintains orders from their existing customers such as IJM, KLK and Felda in Malaysia and Gudang Garam, Musim Mas, and Sinar Mas from Indonesia.
• Resilient Water treatment division. Water treatment segment registered a stellar growth in 9MFY19 in which revenue increased +21.3% yoy and operating profit soared +34.4% yoy, mostly form the projects of constructing waste water, raw water, pure water and biogas. Thus far, this segment has secured orders from various industries, mainly palm oil sector and other industries such as food and chemical. The Group has successfully installed one biogas plant in Sarawak during FY18; two plants have been completed in FY19 while remaining two plants are in progress. The Group expects the two completed plants to generate income in FY20 onwards. Moving forward, the Group envisages the segment to achieve double-digit growth in FY20 banking on encouraging demand from this segment. Besides, the Group could also benefit from the regulation from Malaysian Palm Oil Board (MPOB) which requires all palm oil mills to own biogas facilities in the future. Currently, most of the palm oil mills in Sarawak possess biogas facilities in order to maintain ‘green environment’.
• Overseas sales still relying on Indonesia market. For 9MFY19, exports sales for both segments accounted for 59.9% of total sales (vs FY18: 53.6%). This was mainly contributed by its traditional market which is Indonesia. Looking forward, the Group expects the contributions from other markets such as Thailand, Cambodia, Philippines and Africa to remain flat. However, the Group will put in a concerted effort in propelling the growths for both of its bio energy and water treatment segments for those new markets.
• Development of 20 acres of land in Pulau Indah is stalled. The Group decides to put on hold for its expansion plan in its land in Pulau Indah Industrial Park, Klang which was initially targeted for a new manufacturing plant and warehouse. Currently, the Group focuses on conserving cash, probably to be used for any potential acquisition in either Malaysia or Indonesia should the opportunity arises.

Earnings Outlook

• No change to our core earnings estimates of RM21.8m (+6.0% yoy) for FY19F and RM24.2m (+11.1% yoy) for FY20F. Also, we take this opportunity to introduce our net earnings forecast for FY21F with a 9.6% yoy growth to RM26.5m. Besides, the Group’s net profit margin is expected to remain steady around 6%-10% in line with its strategy of improving order book for its Water treatment segment as well as Bio-energy segment.

Valuation/Recommendation

• Maintain HOLD call for Boilermech with a lower target price of RM0.59 (from RM0.63). Our valuation is now pegged at 12.5x FY20F PER (from 13.5x) to better reflect prevailing challenging outlook in plantation sector as affected by weaker CPO price. Our valuation is slightly lower than its mean PE of 17.6x.

Source: JF Apex Securities Research - 15 Apr 2019