Biomass boiler manufacturer. Incorporated in April 2010, Boilermech Holdings (Boilermech) is involved in the design, manufacture, installing and commissioning of biomass boilers, while providing repair and refurbishment services and engineering solutions as well. The company mainly caters to the palm oil milling and other agriculture-based processing industries such as sugar milling, rubber-based manufacturing, food processing and palm oil refining. The company's total unbilled sales at the end of Aug 2012 were at RM276m, equivalent to 1.8x on its FY2012 revenue.

Doubling floor space. Boilermech recently obtained shareholder approval to purchase a 1.45ha piece of property, including a single-storey factory and three-storey office near its Subang Jaya premises. Once the transaction is completed, the company's production floor space will more than double from 63,200 sq ft to 140,900 sq ft. The acquisition would increase its boiler production capacity from the current five boilers per month to about eight to 10 boilers per month by April 2013.

Flush with cash. Boilermech is currently in a net cash position, with net cash per share of 1.7 sen as of end of July 2012. The company has also put RM43.4m (or 16.8 sen per share) into liquid investments like short-term money market funds, with proceeds that can be collected one day after the notice of withdrawal. It will be purchasing its land acquisition via internal funds. Even after funding, its cash and cash-equivalent portions are still comfortably at RM28.9m (or 11.2 sen per share).

Positive prospects. Sarawak is the next growth area for building palm oil mills as more palm trees reach maturity. From 2008 to end-Sept 2012, the total number of palm oil mills in Sarawak grew by 41.5%, compared to nil in Peninsular Malaysia and 5.1% in Sabah. We see this as an opportunity for Boilermech to get more orders from mills to replace boilers or help facilitate their expansion. Currently, the Indonesian market is its largest revenue contributor, spurred by rapid growth in its palm oil plantation industry. Indonesia's booming upstream activities will spell more business opportunities for the company.

RM0.98 FV. We like Boilermech for its: (i) prudent management, with years of experience in the boiler manufacturing industry, (ii) strong balance sheet, (iii) expansion plan to increase its production floor space, and (iv) position to benefit from the growing palm plantation sectors in both Malaysia and Indonesia. We are recommending a NEUTRAL on Boilermech with a FV of RM0.98, pegged at an average PE of 11.5x on its projected FY13 earnings.

Biomass boiler manufacturer. Biomass boilers are part of the biomass heating system, and are used in agriculture-based processing industries to generate steam to power mill or plant operations and to sterilize the fruit during sterilization process in palm oil mills. Incorporated in April 2010, Boilermech Holdings (Boilermech) is involved in the design, manufacture, installation and commissioning of biomass boilers. It also provides repair and refurbishment services and engineering solutions for biomass boilers. Over 95% of its revenue is generated from boiler contracts. Its repair and refurbishment services contributed about 3%-4% to total revenue in FY12.

The company's Managing Director Mr. Leong Yew Cheong, Executive Director Wong Wee Voo and other key management personnel have over 20 years of experience and in-depth technical know-how in the boiler industry. Strong teamwork and leadership as well as good business contacts in the palm oil industry have enabled the company to grow into one of Malaysia's leading boiler manufacturers.

A boiler project can be categorised into four stages, namely (i) the design of biomass boilers to cater to different biomass fuel sources that have various engineering and site constraints; (ii) manufacturing the pressure vessels at the factory; (iii) on-site installation and (iv) testing and commissioning.

Expansion in the cards. Boilermech recently obtained the green light from its shareholders to purchase a piece of property near its existing premises in Subang Jaya. The land, measuring 1.45ha, is inclusive of a single-storey factory and three-storey office. The production floor space will increase from 63,200 sq ft to 140,900 sq ft. The acquisition would increase its boiler production capacity from the current five boilers per month to about eight to 10 boilers per month by April 2013. The company plans to fund this RM20.3m purchase internally.

Strong orderbook. Boilermech has total unbilled sales worth RM276m as at end-August, equivalent to 1.8x of its FY2012 revenue, and orders secured will be able to last for 15'18 months. The company mainly caters to the palm oil milling and other agriculture-based processing industries such as sugar milling, rubber-based manufacturing, food processing and palm oil refining. Leveraging on its capability and experience to design and manufacture boilers for different biomass sources such as palm and wood wastes, its customers are mainly palm plantation players such as Felda Palm Industries, Sime Darby Plantations, IOI Group, KLK, PT London Sumatra and Wilmar International Ltd.

Moving beyond the palm oil mill industry. About 90% of its total revenue in FY12 came from the palm oil mill-related industry, which will continue to be key driver to the company's growth. Nevertheless, we believe that Boilermech can seek opportunities beyond the palm oil mill industry, which could potentially fetch higher margins, such as the renewable energy sector, in which there are the biogas and more efficient energy-generating industries.

More boiler replacements and capacity expansion in Malaysia. To date, the Malaysian oil palm industry is relatively mature with limited land for expansion. The country currently has over 400 palm oil mills, some of which are aged and obsolete and needs replacing, especially in Peninsular Malaysia. Sarawak is the next growth area to build more palm oil mills as more oil palm trees reach maturity. Between 2008 and end-Sept 2012, the total number of palm oil mills in Sarawak grew by 41.5% compared to nil in Peninsular Malaysia and 5.1% in Sabah. We see this as an opportunity for Boilermech to seek more orders for boiler replacements or expansions.

Capitalising on Indonesia's growing oil palm sector. The Indonesian market is Boilermech's largest revenue contributor, supported by rapid growth in its palm oil plantation industry. The upstream activity, which covers the plantations and CPO production, continues to take the lead in the growing oil palm industry. The total cultivated area for palm oil in the country now stands at close to eight million hectares. According to the director-general of plantation at the Indonesian ministry of agriculture Gamal Nasir, total CPO output is expected to increase from 22.5m tonnes in 2011 to 23.6m tonnes this year as more trees reach maturity. Indonesia's booming upstream activity spells more business opportunities for Boilermech.

Financials

Better 1QFY13 results. Boilermech reported a good set of 1QFY13 results, as earnings rose 53% y-o-y to RM5.4m on the back of a 20% increase in revenue to RM42.0m. The better results were mainly attributed to the increase in the number of delivered and completed projects during the quarter. On a quarterly basis, the EBIT margin improved from 17.1% in 4QFY12 to 17.5% in 1QFY13, due to lower net operating expenses.

Cash rich. Boilermech is currently in a net cash position, with net cash per share of 1.7 sen as at end-July. The company has also invested RM43.4m (or 16.8 sen per share) into liquid assets such as short-term money market funds, where proceeds can be received a day after giving notice of a withdrawal. The company's recent land acquisition will be made via internal funds. Even after funding the acquisition, its cash and cash equivalent portions are still comfortably at RM28.9m (or 11.2 sen per share).

Growing contributions from abroad. Boilermech's overseas market contributed about 63% to total sales in FY12, with Indonesia as its biggest export market, accounting for about 55% of its total revenue in FY12. Other overseas markets include Ivory Coast, Papua New Guinea, Thailand and the Solomon Islands. The domestic market contributed the remaining 37% of its total revenue in FY12, with Sarawak being the key area for growth once more oil palm trees come into maturity.

Solid growth. Boilermech reported steady topline growth, with a compounded annual growth rate (CAGR) of 61% for the past five years. Net earnings grew at a CAGR of 61% over the same period, with net margins improving over the years from 6.7% in FY08 to 12.9% in FY12. We are optimistic about the company's potential future earnings growth, underpinned by stronger orders from its Malaysian and Indonesian markets.

First dividend payout. Boilermech announced its first dividend payout in FY12 since going public. It paid an interim single-tier dividend of 1.25 sen per share in November 2011 and proposed a final single-tier dividend of 1.5 sen per share, bringing total dividends to 2.75 sen per share. This is equivalent to a dividend yield of 3.1% based on yesterday's closing price. Going forward, we expect the company to maintain its dividend payout at 20%-25% of its annual net earnings.

Valuation & Peers Comparison

RM0.98 FV. Its key competitors, namely Vickers Hoskins (M) SB, Advance Boilers SB and a few other boiler players, are private companies. We also took a look at Muar Ban Lee Group (MBL) and CB Industrial Holdings (CBIP), which are involved in palm oil mill-related industries (MBL is an oil seed crushing manufacturer, while CBIP manufactures palm oil equipment, specialising in its patented modipalm). Boilermech's last financial year's PBT margin and current financial year's PE are relatively lower compared to MBL and CBIP's. However, we acknowledge that the nature of these three companies' business is different although they operate in the same industry. In terms of expected ROE for current financial year, Boilermech's ROE of 29.6% beats that of MBL and CBIP.

We like Boilermech for its: (i) prudent management with years of experience in the boiler manufacturing industry, (ii) strong balance sheet, (iii) expansion plan to increase its production floor space, and (iv) the company is benefitting from growing palm plantation sector in both Malaysia and Indonesia. However, we believe that the current valuation on the company is rather on par with its historical performance. We are recommending a NEUTRAL call with a FV of RM0.98 on Boilermech, pegged at an average PE of 11.5x on its projected FY13 earnings.

Source: OSK