Result

• Boilermech Holdings Berhad (Boilermech) posted a net profit of RM5m during 2QFY20, which tumbled 22.1% qoq and 8.8% yoy. Meanwhile, revenue stood at RM56.5m which was down 7.1% qoq but flat yoy, +0.5%. The subdued yoy performance was due to lower margins from both Bio-energy and Water treatment segments coupled with lower project delivery from Water treatment segment. Moreover, the discouraging qoq performance was dented by slower project delivery as well as higher operating cost from Bio-energy segment.

• As for 1HFY20, the Group reported net profit and revenue of RM11.5m and RM117.3m, up 10% yoy and 6.1% yoy respectively.

• Within our expectations. The Group’s 6MFY20 net profit of RM11.5m is within our expectation (47.3%) but below market expectation (43.7% of full year net earnings forecasts).

Comment

• Discouraging Bio-energy division pulled down QoQ performance. Boilermech’s revenue and PBT were down 15.1% qoq and 7.1% qoq respectively during 2QFY20, no thanks to Bio-energy segment as drop in both revenue (- 11.3% qoq) and PBT (-21.3% qoq). Lower Bio-energy segment was due to lower project delivery as well as higher operating cost incurred. However Water treatment segment division performed better as both revenue and PBT increased 24% qoq and 113.1% qoq respectively following higher water treatment project and chemical sales delivery.

• Subdued margin from both segments bogged down YoY earnings. The Group posted a lower PBT which was down 8.7% yoy amid flattish revenue growth of 0.5% yoy. Lower PBT was dragged down by lower PBT margin from both segments (Bio-energy: -0.9 ppts; Water Treatment: -3.5 ppts). However, revenue was slightly higher, thanks to higher contribution from Bio energy segment (+2% yoy) which offset lower revenue from Water treatment segment (-7% yoy).

• Stellar 1HFY20. Cumulatively, Boilermech’s revenue surged 6.1% yoy to RM117.3m mainly buoyed by higher revenue in both segments (Bio-energy: +6.8% yoy and Water treatment: +1.6% yoy). Besides, the Group’s PBT margin also grew +0.4 ppts due to better margin in Bio energy segment. Overall, 1HFY20 performance was lifted by increase in project delivery especially from the major repair and refurbishment projects from Bio energy division.

• Export sales abated, but still dominated overall top line. Exports sales only accounted for 56.7% of Boilermech’s revenue in 1HFY20 as compared to 61% during 1HFY19. We believe most of the contracts secured were mainly from Indonesia.

• Steady outlook. Looking forward, the Group remains upbeat on its business performance for the rest of the FY20F despite the challenging business operating environment. Besides, we expect the Group to sustain its business growth following current uptrend of CPO price which could lead to rebound in the prospects of plantation sector and improvement in planting activities for Malaysian market. However, lower production yield for Indonesian market as well as environmental and social issues could still affect the planters’ upstream activities, thus hindering the Group’s expansion plans.

Earnings Outlook

• We retain our earnings forecasts for FY20 and FY21 at RM24.3m (-8.6% yoy) and RM26.6m (+9.6% yoy) respectively.

Valuation/Recommendation

• Maintain HOLD call for Boilermech with an unchanged target price of RM0.65, which is based on PE valuation of 14x FY20 EPS. Target P/E ratio assigned is slightly below its 3- years average P/E of 16x.

Source: JF Apex Securities Research - 22 Nov 2019