BMGREEN’s 1HFY24 results beat expectations. Its 1HFY24 net profit surged 1.5x YoY driven by strong billings and improved margins. On a more cautious tone, soft CPO prices may push back planters’ capex plans including the replacement or upgrading of boilers. We raise our FY24-25F earnings by 16% each, lift our TP by 13% to RM0.81 (from RM0.72) but maintain our UNDERPERFORM call.

Above expectations. Its 1HFY24 net profit of RM16m beat expectations, coming in at 69% and 61% of our full-year forecast and the full-year consensus estimate, respectively. The key variance against our forecast came largely from the stronger-than-expected margins at its boiler manufacturing and solar energy segments.

Results’ highlights. YoY, BMGREEN’s 1HFY24 revenue rose 24% underpinned by strong billings across the board, i.e. boiler manufacturing (+19%), water treatment projects (+26%) and the solar energy segment (+72%), particularly in the residential space. Its core net profit surged 1.5x thanks to: (i) lower input costs at its boiler manufacturing segment specifically hot-rolled coil (-21% YoY), and (ii) lower solar panel prices and the write-back of doubtful debt at its solar energy segment.

QoQ, Likewise, its core net profit increased 10% thanks to better performance from the water treatment and solar energy segments.

Outlook. BMGREEN’s boiler manufacturing segment may be hit by the soft CPO prices that pushed back planters’ capex plans including the replacement or upgrading of boilers. On a brighter note, its solar energy segment is riding on a new wave of investment in renewable energy (RE) generation assets underpinned by the government’s commitment towards RE making up 70% of total generation mix by 2050, as outlined in the National Energy Transition Roadmap (NETR). We are mindful that boiler manufacturing contributes to the lion’s share of BMGREEN’s total profits, to the tune of about 78%, vs. about 13% of the solar energy segment.

Forecasts. We raise our FY24-25F earnings by 16% each to reflect higher margins in the boiler manufacturing and solar energy segments.

Consequently, we raise our TP by 13% to RM0.81 (from RM0.72) based on an unchanged 16x PER and a rolled-forward FY25F EPS, at a 20% premium to the historical one-year forward PER of 13x of boiler makers to reflect BMGREEN’s additional growth potential in the renewable energy space. There is no change to our TP based on ESG given 3-star rating as appraised by us (see Page 4).

We like BMGREEN 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 soft CPO prices, palm oil millers are likely to cut back on their capex including the replacement and upgrading of boilers. Maintain UNDERPERFORM.

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 - 20 Nov 2023