We initiate coverage on BOILERM with an OUTPERFORM rating and TP of RM0.90 based on 16x FY24E EPS. An established name in designing and fabricating boilers for the palm oil industry, its outlook will be fuelled by anticipated post-Covid recovery in orders, better market condition on robust palm oil prices and greater focus on the large Indonesian palm oil sector. The Group’s recent venture into biogas capture and solar energy is also poised to grow by double-digit.

Recovering demand for boilers. Over 80% of BOILERM’s revenue is driven by the plantation sector, reflecting its core strength as one of the leading one-stop Engineering, Procurement and Construction (EPC) supplier of boilers to the agriculture sector most notably to palm oil millers. Crude Palm Oil (CPO) price started inching up in 2020 but its orderbook was interrupted by various Covid-19 containment measures. Having progressed into the endemic phase, more orders and works can now be expected. Over and beyond post-Covid demand recovery, strong CPO prices also mean more plantation companies can consider upgrading or even building new mills. Moreover, BOILERM is set to place greater emphasis on the Indonesian palm oil market following the opening of its boiler manufacturing plant at Surabaya in March 2021. We estimate that the Indonesia market could be three times larger than Malaysia.

Growing water treatment cum biogas (methane) capture footprint. In 2016, BOILERM ventured into wastewater treatment involving designing, construction and wrapping up effluent ponds from palm oil mills to capture methane. As methane emission is the chief greenhouse gas (GHG) culprit in the operation of a palm oil mill and the biogas can be used as renewable fuel, a positive demand outlook can be expected as a proxy to higher palm oil outputs.

Embarking in solar energy. In 2020, BOILERM acquired Tera VA Sdn Bhd (TeraVA), a pioneer in the solar photovoltaic EPC segment, to focus on designing and commissioning solar photovoltaic system for commercial, industrial, and residential customers. A growing but competitive segment, we believe BOILERM plans to tap into this market by leveraging on its capital strength, engineering knowhow and business network (including its parent QL Resources) to scale faster and grow market share.

Post FY22, we expect FY23E Core Net Profit (CNP) to edge up to RM21.0m (+23.5% YoY) on post-Covid recovery for its boiler business and double-digit growth for its solar EPC business. Nonetheless, we expect margins to stay weak on higher raw material and manpower costs. However, given the Group’s strength in the boiler segment and good palm oil prices, margins should gradually recover to help BOILERM ends FY24 with a CNP of RM28.9m (+37.9% YoY).

Initiate coverage with an OUTPERFORM call and a TP of RM0.90. Our TP is based on FY24E EPS of 5.6 sen at 16x PER, a 20% premium to the historical one-year forward PER of boiler manufacturing and integrated plantation players. We believe the premium is fair thanks to BOILERM’s: (i) accelerated Indonesian expansion with its new manufacturing plant in Surabaya; (ii) historically lower cyclical earnings compared to the plantation sector; (iii) growth opportunities in the ESG-friendly renewable energy (RE) space; and (iv) better ROE from its core Boiler EPC business due to less intense competition compared to the plantation sector’s global edible oils market.

Risks to our call include: (i) disruption of supply chain, (ii) higher-than-expected manpower expenses, (iii) heavy dependence on a single industry, (iv) foreign exchange translation risk. 

Source: Kenanga Research - 14 Jul 2022