Despite a surge in solar contribution, BMGREEN’s 1QFY25 results missed expectations due to weak progress billings for its boiler manufacturing segment. Its 1QFY25 core net profit rose 5% YoY driven by higher margin projects and lower input costs. However, planters’ capex plans including the replacement or upgrading of boilers may be pushed back if CPO prices do not firm up. Hence, we cut our FY25F earnings forecast by 7% but maintain our TP of RM1.30 with UNDERPERFORM call.

Below expectations. Its 1QFY25 net profit of RM8.0m came in below our full-year forecast and full-year consensus estimate at only 18% and 19%, respectively. The variance against our forecast came largely from slower- than-expected work progress from its boiler manufacturing segment.

YoY, its 1QFY25 revenue fell 9% due to slower work progress and lower production activity in its boiler manufacturing segment (-23%) which remains the primary revenue driver. This slowdown aligns with our view that planters will focus on replanting older trees instead. However, the decline was partially offset by a surge in its solar energy segment (+111%) driven by increased residential installations under the Solar For Rakyat Incentive Scheme (solaRIS), offering rebates ranging from RM1,000 to RM4,000 per kWac Its core net profit grew 5% due to: (i) higher-margin project completions across the board, (ii) lower input cost specifically, hot- rolled coil (-3% YoY), and (iii) reversal of doubtful debt provisions in the solar segment (without which CNP growth would have been 13%).

QoQ, its 1QFY25 core net profit dipped by 32% due to weaker performance from its boiler manufacturing and water treatment segments.

Outlook. The prospects for BMGREEN’s boiler manufacturing segment are unfavourable as planters are holding back from replacing or upgrading their boilers amidst flattish CPO prices for other priorities, i.e. replanting of older trees. On a brighter note, its solar energy segment is riding on a new wave of investment in renewable energy (RE) generation assets underpinned by the government’s commitment towards RE making up 70% of total generation mix by 2050, as outlined in the National Energy Transition Roadmap (NETR).

Forecasts. We trim our FY25F earnings forecast by 7% to account for lower project deliveries in the boiler manufacturing segment while keeping our FY26F unchanged.

Valuations. We maintain our TP of RM1.30 based on SoP valuation, ascribing 13x FY26F PER for its bioenergy services division (consistent with the average historical forward PER of boiler makers) and valuing at 30x FY26F PER its EPCC segment (in-line with the average historical 1- year forward PER of the solar EPCC sector). There is no change to our TP based on ESG given 3-star rating as appraised by us (see Page 4).

Investment case. We like BMGREEN for: (i) the long-term trend of investment and upgrading of palm oil milling assets driven by the growing ESG awareness among palm oil millers, (ii) its strong customer base with reputable names in the industry such as KL Kepong, Wilmar, Sime Darby, Boustead and Tradewinds, and (iii) its traction in rooftop solar EPCC jobs.

However, over the immediate term, amidst flattish CPO prices, planters are likely to cut back on their capex including the replacement and upgrading of boilers. Maintain UNDERPERFORM.

Risks to our call include: (i) palm oil millers restarting their capex plans on a sharp rise in CPO prices, (ii) lower input cost, and (iii) operations in regional markets gain traction.

Source: Kenanga Research - 27 Aug 2024