BOILERM is taking full ownership of solar photovoltaic (PV) system engineering, procurement, and construction (EPC) contractor Tera VA Sdn Bhd (Tera). It is buying out the remaining 35% stake for RM8.2m cash, translating into a FY23F PER of about 9x based on our forecast. We are mildly positive that this move will strengthen its presence in the renewable energy space. We maintain our forecasts, TP of RM0.83 and OUTPERFORM call.

BOILERM is taking the full ownership of Tera, a solar PV system EPC contractor in industrial, commercial and domestic markets. It is buying out the remaining 35% stake from the vendor, i.e. Tera’s executive director, for RM8.2m cash. The deal comes with a profit guarantee of RM4.2m over an unspecified period of time. Also, upon the completion of the transaction, the vendor will continue to run the business as a professional manager.

The deal values Tera in its entirety at RM23.4m. Based on our FY23F net profit of RM2.7m for Tera, this translates to an acquisition PER of about 9x, which is at a discount to our valuation basis of 15x forward earnings for a similar company SAMAIDEN.

A point to note is that BOILERM first acquired a 60% in Tera in 2020 for RM2.5m cash when the solar EPC contractor was still at its infancy.

The latest acquisition will reduce BOILERM’S net cash of RM62.7m as at end-Sep 2022 to RM54.5m.

Based on our estimates, the acquisition will boost BOILERM’s FY23-24F net profit by 3-4% (elimination of Tera’s MI, partially offset by interest income foregone on RM8.2m) which is immaterial and as such we maintain our forecasts. We are mildly positive on this latest move by BOILERM which will strengthen its presence in the renewable energy space.

We continue to like BOILERM for: (i) the current capex upcycle of palm oil millers on the back of sustained firm CPO prices, (ii) the long-term investment and upgrading of palm oil milling assets 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.

We maintain our TP of RM0.83 based on 16x FY24F PER, at a 20% premium to the historical one-year forward PER of 13x of boiler makers. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). Maintain OUTPERFORM.

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 - 27 Dec 2022