Kenanga Research & Investment

BM Greentech - Weak Demand Outlook for Boilers

Publish date: Wed, 29 May 2024, 10:49 AM

BMGREEN’s FY24 results beat expectations. Its FY24 core net profit more than doubled on improved billings and as it was no longer weighed down by high-cost inventory. However, its prospects remain unfavourable as millers hold back from replacing or upgrading boilers amidst flattish CPO prices. We raise our FY25F earnings forecast by 31%, lift our TP by 42% to RM1.15 (from RM0.81) but maintain our UNDERPERFORM call.

Its FY24 net profit of RM33.6m beat our forecast and consensus estimate by 24% and 12%, respectively. The variance against our forecast came largely from lower input cost at its boiler manufacturing unit and higher deliveries of rooftop solar EPCC jobs.

YoY, its FY24 revenue grew 17% primarily due to higher billings across the board, i.e. boiler manufacturing (+11%), water treatment (+5%), and rooftop solar EPCC (+72%). Its core net profit more than doubled thanks to lower input cost, specifically, hot-rolled coil (-5% YoY).

QoQ, similarly, its 4QFY24 top line rose 16% on higher billings from boiler manufacturing and rooftop solar EPCC. Its core net profit more than doubled on margin recovery at its boiler manufacturing as the division was no longer weighed down by high-cost inventory.

Outlook. The prospects for BMGREEN’s boiler manufacturing segment are unfavourable as planters are holding back from replacing or upgrading their boilers amidst flattish CPO prices for other priorities, i.e. replanting of older trees. 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).

Forecasts. We raise our FY25F earnings forecast by 31% to reflect higher rooftop solar EPCC jobs and lower input cost while introducing our FY26F numbers.

Valuations. Correspondingly, we raise our TP by 42% to RM1.15 (from RM0.81) as we also roll forward our valuation base year to FY26F based on an unchanged 16x PER, 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).

Investment case. 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, (ii) its strong customer base with reputable names in the industry such as KL Kepong, Wilmar, Sime Darby, Boustead and Tradewinds, and (iii) its traction in rooftop solar EPCC jobs. However, over the immediate term, amidst flattish CPO prices, planters 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 cost, and (iii) operations in regional markets gain traction.

Source: Kenanga Research - 29 May 2024

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