• U/G to NEUTRAL, with new MYR0.63 TP from MYR0.60, 6% downside. Boilermech’s FY23 (Mar) results exceeded expectations, due to better performances from the water treatment and solar energy segments. As share price has retraced 16% over the past three months, valuation is now fair, trading at 15x – in line with its historical P/E mean of 15x.

• FY23 core profit of MYR19.6m (+6% YoY) exceeded expectations, at 127% of our and 147% of consensus’ FY23 projections. The deviations are from higher-than-expected PBT from water treatment and solar energy segments. BMHB declared a FY23 final DPS of 1.75 sen, in line with our forecast. This translates to a FY23 payout ratio of 64% or 2.6% yield.

• Bio-energy, the biggest segment, posted 26% YoY PBT decline in FY23, despite recording higher revenue (+19% YoY). This was mainly due to projects with lower profit margins – its FY23 PBT margin thinned to 4.6% (vs 7.4% in FY22). We expect this trend to continue in FY24 as the palm oil sector downturn may discourage planters to replace or upgrade their boilers. We understand that most planters are focusing more on replanting and rehabilitation of their estates. We expect the non-palm oil sector to lead this segment’s +2-3% YoY revenue growth for FY24-25F.

• Water treatment PBT rose 18% YoY to MYR5.9m in FY23, while revenue increased 29% YoY. Although FY23 PBT declined to 12.3% (vs 13.3% in FY22), this was higher than our 9.8% estimate. Despite having the highest margin, this segment only made up 28% of FY23’s PBT. The lower-margin projects are mainly non-palm oil industry related, which we believe would continue to be the main contributor of our +10% segment revenue growth forecast for FY24F.

• Solar energy PBT fell 42% YoY to MYR1.4m in FY23, despite a 10% YoY jump in revenue – likely due to solar panel prices rising during this period. As a result, its FY23 PBT margin declined to 3.8% (vs 7.2% in FY22). We believe the margin may improve, given the normalisation of solar panel prices since end-2022. Regardless, the solar energy segment only contributed 4% to FY23’s PBT. Given the increased interest in green energy, we anticipate an 8% FY24F revenue growth for this segment.

• We revise up FY24 earnings estimates by 7% after imputing higher PBT margins for water treatment and solar segments and lower margin for bio- energy, while revising FX assumptions. FY25F earnings stay unchanged.

• U/G to NEUTRAL with a new MYR0.63 TP, based on an unchanged 15x FY24F P/E. Our TP takes into account a 4% ESG discount, given BMHB’s 2.8 ESG score. Valuation is now fair, in line with its historical mean of 15x.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 26 May 2023