• Maintain SELL, TP rises to MYR0.62 from MYR0.60, 18% downside. Boilermech has completed the acquisition of a 35% stake in its solar energy unit, TERA VA, making the latter a wholly-owned subsidiary post- transaction. That said, valuations remain expensive, as the stock is trading at 17.5x FY23F (Mar) P/E, above the historical mean P/E of 15x.

• Remaining 35% stake purchased with cash. Boilermech entered into a share acquisition agreement with Leong Jit Min to acquire 245,000 shares of TERA VA (representing the remaining 35% interest not held by Boilermech) for a cash consideration of MYR8.2m, of which MYR4.2m will be retained as a profit guarantee. The acquisition, completed on 6 Jan, was funded by internal resources. Leong, the main executive director managing TERA VA, will continue his executive service post-acquisition.

• A reasonable deal. We estimate FY23F PAT contributed by TERA VA to amount to about MYR1.1m. As the acquisition values TERA VA at MYR23.4m, its FY23F P/E is 20.8x – which is in line with the valuations of its renewable energy peers, which range 17-29x.

• Immaterial impact to earnings. We are neutral on this development, as we anticipate a slightly accretive, yet immaterial impact on FY24-25F earnings. This is particularly due to the lower share of minority interest offset by interest income forgone. To recap, Boilermech’s solar energy unit accounted for only 7% of its 1HFY23 revenue, with a PBT of -MYR0.3m. We expect Boilermech to remain in a net cash position, given its cash reserves of MYR62.7m as at 1HFY23.

• We increase FY24-25F earnings by 3%, due to the lower share of minority interest offset by loss of interest income, while FY23F earnings remain unchanged, given its immateriality.

• Maintain SELL, with a slightly higher TP of MYR0.62 based on an unchanged 15x FY23F P/E. Our TP also includes a ESG discount of 4% applied, given Boilermech’s ESG score of 2.8. Its current valuation is lofty – at 17.5x 2023F P/E, above the historical mean of 15x.

• Key upside risks include raw material price fluctuations, disruptions in the supply chain and favourable FX rate movements.

Source: RHB Research - 9 Jan 2023