Boilermech’s 1QFY14 results fell slightly below our forecasts, with its MYR6.3m earnings accounting for about 21% of our full-year estimate while  its  topline  of  MYR51.5m  clocked  in  at  24%  of  our  full-year  target.  The  lower  bottomline  was  due  to  higher  operating  expenses  in 1QFY14.  On a quarterly basis, 1QFY14’s PBT of MYR8.5m was 25% lower compared to its normalised 4QFY13 results. Boilermech is still in a net cash position, with net cash per share of 25.6 sen as at end-June. As the stock has appreciated by 73% since our upgrade in March, we are downgrading its rating from Buy to NEUTRAL, with an unchanged FV of MYR1.70, premised on a 14x P/E.   
 
Bottomline misses target. Boilermech’s 1QFY14 results slightly missed our forecast, with its bottomline of MYR6.3m accounting for about 21% of  our  full-year  estimate  while  its  revenue  of  MYR51.5m  made  up  24%  of  our  full-year  target.  The  lower  bottomline  was  due  to  higher operating expenses in 1QFY14. 

Weaker q-o-q. Due to the change of financial year end (FYE) from April to March, Boilermech’s 4QFY13 results only consisted of two months’ contribution.  On  a  normalised  basis,  1QFY14’s  PBT  of  MYR8.5m  was  25%  lower  q-o-q  compared  to  the  preceding  quarter  despite  its  flat revenue  growth,  mainly  due  to  the  incidence  of  higher  profit  margins  from  some  projects  in  4QFY13.  On  an  annual  basis,  we  compared  its 1QFY14  (March-June  2013)  to  1QFY13  (April-July  2012),  due  to  a change in the company’s FYE.  Its  1QFY14  net  profit  of  MYR6.3m  was  17% higher y-o-y on the back of 23% increase y-o-y in revenue, primarily due to an increase in orders for its boilers.

Flush with cash. The company has a strong balance sheet, with a total net cash and cash equivalent of RM66m or net cash per share of 25.6 sen as at end-June 2013, compared to net cash per share of 14.4 sen as at end-April 2012. Note that Boilermech does not have a fixed dividend policy.  Given  its  cash-rich  position,  we  do  not  discount  the  possibility  of  a  higher  dividend  payout  policy  in  the  future.  Nevertheless,  we  are maintaining our dividend forecast of 2.5 sen for now, which translates to a dividend yield of 1.4% for FY14F.  
 
NEUTRAL, FV maintained at MYR1.70. Going forward, we see no changes in its business model and direction, as the company will continue to focus on its forte in biomass boiler manufacturing.  It is in the midst of doubling its production capacity from about five boilers per month to 8-10  boilers  upon  the  completion  of  its  expansion  plan.    The  stock  has  appreciated  by  73%  since  our  upgrade  in  March.  While  we  still  like Boilermech for its solid balance sheet and positive future prospects, we are downgrading the stock from Buy to NEUTRAL. We are leaving our forecasts unchanged with a FV of MYR1.70, pegged to an unchanged P/E of 14x which implies a price earnings-to-growth ratio (PEG) of 0.6x.  

Source: RHB