We recently met up with Boilermech’s management for an update on the company. Its business is progressing well, with a total orderbook of MYR276m as at end-Aug 2012. The company is exploring opportunities to market its palm-based biomass boilers in Thailand. Meanwhile, the move by an increasing number of Malaysian rubber glove players to convert to biomass energy in response to Government attempts to gradually reduce natural gas subsidies bodes well for the company. For a growth stock like Boilermech which enjoys great opportunities, we are forecasting a CAGR of 21.3% and 20.9% respectively for FY14 revenue and net earnings. Maintain Buy, with a FV of RM1.43, pegged to a P/E of 14x, which we deem reasonable as its price earnings-to-growth ratio (PEG) of 0.72x implies that investors are paying less than the projected normalised net earnings growth of 19.5%.

Business in good shape. Boilermech’s business is doing well. It has secured a total orderbook of over RM276m as at end-August 2012. This is equivalent to 1.8x its FY12 revenue. Malaysia and Indonesia remain its primary markets, accounting for over 80% of its total sales.

Growth potential in Thailand. Indonesia and Malaysia are globally recognized as the world’s top two crude palm oil (CPO) producers. In contrast, Thailand’s position as the world’s third largest CPO producer receives scant attention. The country is set to achieve a record CPO output of over 2m tonnes this year, an improvement from about 1.8m tonnes recorded in 2012. According to Thailand’s Palm Oil Crushing Mill Association, there are 76 palm oil mills in Thailand in 2011 with total production capacity of 2,791 tonnes per hour. As such, besides having a presence in Malaysia and Indonesia, Boilermech is looking at expanding its reach to Thailand. Although the Thai oil palm plantation market is relatively small compared to the Indonesian and Malaysian markets, which registered 25.9m tonnes and 18.5m tonnes in CPO production in 2012, it offers growth potential nonetheless.

Potential growth areas. Boilermech’s biomass boilers cater mainly to the oil palm plantation industry. The company is also exploring other renewable energy solutions for palm oil mills. Generally, the milling industry burns empty fruit bunches as the main fuel source to generate heat and electricity. Boilermech is exploring the feasibility of using other parts of the palm tree as a fuel source. Besides its plan to expand its geographical reach to Thailand, it is also looking at selling more boilers in other industries, such as the rubber glove industry.

Buy, MYR1.43 FV. Going forward, Boilermech will continue to focus on its forte in biomass boiler manufacturing while expanding horizontally into other regions as well as vertically by offering other renewable energy solutions. It is ramping up production capacity to about 10 boilers a month by 2H this year from the current six boilers monthly. This will give it a platform to expand its business. Opportunities are aplenty for Boilermech, which is exploring the Thai market and rubber glove industry as well as other renewable energy solutions. We are forecasting a CAGR of 21.3% and 20.9% respectively in its FY14 revenue and net earnings. The company’s fundamentals remain intact, backed by a strong balance sheet. As at end-January 2013, it had a total net cash of RM23.0m. We maintain our Buy call on Boilermech with a FV of RM1.43, pegged to a P/E of 14x, which we deem reasonable as its price earnings-to-growth ratio (PEG) of 0.72x implies that investors are paying less than the projected normalised net earnings growth of 19.5%. At the current price, the stock offers a dividend yield of 3.3%.

Source: RHB