BOILERM’s 1QFY23 results met our forecast. Against a backdrop of firm CPO prices, oil palm millers have a strong case for investing in new boiler facilities or retrofitting old ones. BOILERM will also ride on the strong demand for water treatment, biogas capture solution and solar power generation on greater ESG awareness. We maintain our forecasts, TP of RM0.90 and OUTPERFORM call.

1QFY23 PATAMI came in at only 14% of our full-year forecast. However, we consider the results within expectation as we expect stronger quarters ahead as progress billings accelerate, resulting in better economies of scale and overhead absorption.

1QFY23 revenue rose by 10% driven by higher contributions across the board, i.e. boiler manufacturing (+5%), water treatment (+55%) and solar energy (+31%) as productivity improved when the economy reopened. However, PATAMI declined by 48% as it had yet to operate at optimum levels and hence it was unable to achieve economies of scale and effectively absorb overheads. Not helping either was cost pressures from inputs.

We expect BOILERM’s project execution to gather momentum over the remaining quarters as the economy comes out the other end of the pandemic. Against a backdrop of firm CPO prices, oil palm millers have a strong case for investing in new boiler facilities or retrofitting old ones. BOILERM will also ride on the strong demand for water treatment, biogas capture solution and solar power generation on greater ESG awareness.

Maintain OUTPERFORM call and TP of RM0.90 based on FY24F EPS of 5.6 sen at 16x PER, a 20% premium to the historical one year forward PER of boiler manufacturers. 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 space, and (iv) better ROE from its core boiler manufacturing business due to less intense competition compared to the plantation sector’s global edible oils market, to which it also caters to.

Risks to our call include: (i) disruptions of supply chain, (ii) escalating cost of input including materials and labour, (iii) heavy dependence on the palm oil industry, and (iv) forex translation risk for overseas projects.

Source: Kenanga Research - 26 Aug 2022