BOILERM’s operating environment is normalising as the pandemic moves towards an end. Its margins are improving as the cost of key inputs particularly steel eases. Despite the recent weakness in CPO prices, its customers are still committed to investing in new boilers or retrofitting the old ones. Commissioned back in March 2021, its new boiler manufacturing facility in Surabaya, Indonesia, has already achieved an utilisation rate of 60% currently. We maintain our forecasts, TP of RM0.90 and OUTPERFORM call.

We came away from a recent engagement with BOILERM feeling reassured of its improving outlook. Its operating condition is normalising as the pandemic moves towards an end. The key takeaways are as follows:

1. BOILERM acknowledges that it is challenging to pass on higher costs to end-customers as it typically enters into fixed-price contracts with them while the cost of inputs fluctuates (more so amidst persistent supply-chain disruptions). Recall, it suffered margin compression when the cost of inputs such as steel soared during the initial global economies reopening period, spurring demand which overwhelmed supply. The good news now is prices of steel have eased, paving the way for BOILERM’s margin recovery from 3QFY23 onwards (which is consistent with our assumptions). However, the same cannot be said for its solar segment given the still elevated price of solar photovoltaic panels globally amidst persistent supply-chain disruptions.

2. BOILERM sensed that its customers are still committed to investing in new boilers or retrofitting the old ones as they still enjoy a strong cash flow at the current CPO prices (which are still very elevated by historical standards). Also helping, is the growing ESG awareness among palm oil millers, driving new demand for environment preservation solutions such as better water treatment systems.

3. Commissioned back in March 2021, its new boiler manufacturing facility in Surabaya, Indonesia, has already achieved an utilisation rate of 60% currently. At present, the plant largely supplies to the East Java region (while its Malaysian operation will continue to supply to the other parts in Indonesia). BOILERM also sees tremendous opportunities for its water treatment systems in Indonesia that is virtually untapped currently. We believe BOILEM’s diversification into Indonesia is a step in the right direction given the still growing plantation industry in Indonesia, vs. a more matured one in Malaysia.

We maintain our forecasts and TP of RM0.90 based on 16x FY24F PER, at a 20% premium to the historical one-year forward PER of 13x of boiler makers to reflect: (i) the current capex upcycles of palm oil millers on the back of elevated CPO prices, (ii) the additional opportunities driven by the growing ESG awareness among palm oil millers, and (iii) its strong customer base with reputable names in the industry such as KL Kepong, Wilmar, Sime Darby, Boustead and Tradewinds. There is no change to our TP based on ESG given a 3- star rating as appraised by us (see Page 3).

Risks to our call include: (i) palm oil millers dialing back on their capex plans on a sharp fall in CPO prices, (ii) rising input costs, and (iii) risks associated with operating in developing economies.

Source: Kenanga Research - 5 Oct 2022