• Maintain SELL, with new MYR0.60 TP from MYR0.62, 24% downside. 9MFY23 (Mar) results fell short of expectations, resulted from the underperformance across all three segments. We believe 4QFY23 earnings will slightly improve QoQ, in anticipation of the higher revenue recognised before concluding FY23. However, valuation remain lofty, trading at 19.4x 2024F P/E, above its historical P/E mean of 15x.

• Boilermech recorded 9MFY23 core profit of MYR12.1m (-16% YoY), below our and consensus estimates, at 67-68% of FY23 projections. The deviations came from lower-than-expected PBT contributions across all three segments.

• Bio-energy segment recorded lower PBT of MYR0.4m (-90% YoY) in 3QFY23, contributing to 9MFY23 PBT of MYR7.8m (-53% YoY) despite higher revenue of 11% YoY. The segment made up 79% and 76% of Boilermech’s 9MFY23 revenue and PBT. The PBT decline despite higher revenue was mainly due to delivery of projects with lower profit margin – we expect this trend to continue until end-FY23F. Therefore, its 9MFY23 PBT margin has thinned to 3.8% (from 8.9% in 9MFY22), which is below our FY23F margin of 7.1%.

• Water treatment PBT declined 14% YoY to MYR1.8m in 9MFY23, due to higher delivery of projects and sales with lower profit margin. Its 3QFY23 revenue rose 7.6% YoY while 9MFY23 revenue increased 18.9% YoY, mainly contributed by the sales and service division. However, its 9MFY23 PBT margin has declined to 6.8% (vs 9.5% in 9MFY22), lower than our assumption of 10.4% for FY23. The low-margin projects are mainly non-palm oil industry related, which could continue to be recognised until early FY24F. While this segment has the highest PBT margin, it only made up 18% of 9MFY23 PBT.

• Solar energy PBT fell 69% YoY to MYR0.7m in 9MFY23 despite a 32% YoY jump in revenue. This was mainly due to higher provision for doubtful debts made. However, on a quarterly basis, its PBT margin has finally improved to 6.6% in 3QFY23 (from -5.9% QoQ) after experiencing declining margins for three consecutive quarters, while 9MFY22 margin of 2.4% was still below our 4% assumption. Regardless, the solar energy segment only contributed 7% to 9M22 PBT.

• We revise our earnings estimates to adjust for lower-than-expected PBT contribution assumptions across all segments, to be in line with the current margins. All in, we cut our FY23F-25F earnings by 1-14%.

• Maintain SELL with a new MYR0.60 TP, based on an unchanged 15x FY24F P/E. Our TP has taken into account an ESG discount of 4%, given Boilermech’s ESG score of 2.8. Its current valuation is expensive – at 19.4x 2024F P/E, above its historical mean of 15x.

Source: RHB Research - 24 Feb 2023