BOILERM’s 1QFY24 results met expectations. Its 1QFY24 net profit more than doubled on improved billings and lower input cost. However, we are cautious on BOILERM as palm oil millers are likely to cut back on the purchase of new boilers amidst weak CPO prices. We maintain our forecasts and TP of RM0.72 but downgrade our call to UNDERPERFORM from MARKET PERFORM after the recent runup in its share price.

Within expectations. Its 1QFY24 net profit of RM7.6m came in at 33% each of both our full-year forecast and the full-year consensus estimate. However, we consider the results within expectations as we expect a softer 2H as new boiler orders from palm oil millers slow on weak CPO prices.

Results’ highlights. YoY, BOILERM’s 1QFY24 revenue jumped 30% driven by higher contributions across the board, including: (i) boiler manufacturing (+30%), (ii) water treatment (+5%), and (iii) solar energy (+70%) segments. However, its net profit more than doubled buoyed by: (i) improved margins at its boiler manufacturing segment (+5ppts) on cheaper input cost as its inventory was carried at lower cost, and (ii) better showing from the solar energy segment on reduced provision for doubtful debts.

QoQ, despite a 14% reduction in revenue, its net profit rose by 17% thanks to lower input cost.

Outlook. Amidst weak CPO prices, we believe palm oil millers are inclined to hold back their capex plans, including the purchase of new boilers. On the bright side, we see great potential in BOILERM’s solar energy segment driven by the government’s initiatives to scale up rooftop solar. Furthermore, the government has set an ambitious target of achieving 70% RE power capacity by 2050 under the National Energy Transition Roadmap (NETR). However, the contribution from this segment is expected to be marginal due to its much smaller scale when compared to the group’s boiler manufacturing segment.

Forecasts. Maintained.

Consequently, we maintain our TP of RM0.72 based on an unchanged 16x FY24F PER, at a 20% premium to the historical one-year forward PER of 13x of boiler makers to reflect BOILERM’s additional growth potential in the renewable energy space. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like BOILERM for: (i) the long-term trend of investment and upgrading of palm oil milling assets driven by the growing ESG awareness among palm oil millers, and (ii) its strong customer base with reputable names in the industry such as KL Kepong, Wilmar, Sime Darby, Boustead and Tradewinds. However, over the immediate term, amidst weak CPO prices, palm oil millers are likely to cut back on their capex including the purchase of new boilers. Downgrade to UNDERPERFORM from MARKET PERFORM as its valuation is stretched after the recent run-up in its share price.

Risks to our call include: (i) palm oil millers restarting their capex plans on a sharp rise in CPO prices, (ii) lower input costs, and (iii) operations in regional markets gain traction.

Source: Kenanga Research - 25 Aug 2023