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This article first appeared in The Edge Financial Daily on April 16, 2019

Boilermech Holdings Bhd
(April 15, 55 sen)
Maintain hold with lower target price (TP) of 59 sen (previously 63 sen):
We met Boilermech’s management recently and came back feeling slightly positive on the group’s future prospects. To recap, Boilermech registered stellar growth with revenue and net profit up 3% year-on-year (y-o-y) and 12.3% y-o-y respectively in the nine months of the financial year 2019 (9MFY19).

For the full year (FY19), it expects overall performance to be slightly better compared to the previous year, banking on higher order book from the bioenergy and water treatment segments amid recovery in the plantation industry.

Looking forward, its business will be propelled by higher demand for boilers in the Indonesian market following a strong expansion of the plantation business in the country as compared to Malaysia.

Likewise, the water treatment business is also expected to record robust growth going forward, underpinned by strong demand from multi-industries and strong market positions in Sabah and Sarawak.

The current order book for both segments is close to RM170 million-RM220 million, which is on par with its FY18’s revenue. Looking forward, it expects to replenish its order book to about a year for FY20F mainly from the Indonesian market.

This segment has been experiencing a challenging growth in the past few years due to uninspiring market condition and lower production in the palm oil industry which eventually affected the demand for boilers. However, as for 9MFY19, the bio-energy segment has regained its momentum by improving 0.2% y-o-y for revenue while operating profit was up by 11.3% y-o-y.

The bio-energy segment’s revenue was backed by higher sales in standard biomass boiler which mainly caters to the palm oil mills and other agricultural-based processing industries. The group’s current market share for boilers is estimated at 50%-60% for Malaysian market and about 25%-30% in Indonesian market.

The water treatment segment registered a stellar growth in 9MFY19 in which revenue rose 21.3% y-o-y and operating profit soared 34.4% y-o-y, mostly from the projects of constructing waste water, raw water, pure water and biogas. Thus far, this segment has secured orders from various industries, mainly palm oil sector and other industries such as food and chemical.

The group has successfully installed one biogas plant in Sarawak during the 2018 financial year (FY18); two plants have been completed in FY19 while remaining two plants are in progress. It expects the two completed plants to generate income in FY20 onwards. Moving forward, it sees the segment to achieve double-digit growth in FY20 banking on encouraging demand from this segment.

Besides, the group could also benefit from the regulation from Malaysian Palm Oil Board which requires all palm oil mills to own biogas facilities in the future. Currently, most of the palm oil mills in Sarawak possess biogas facilities in order to maintain ‘green environment’.

For 9MFY19, exports sales for both segments accounted for 59.9% of total sales (versus FY18: 53.6%). This was mainly contributed by its traditional market which is Indonesia. Looking forward, the group expects the contributions from other markets such as Thailand, Cambodia, the Philippines and Africa to remain flat.

However, it will put in a concerted effort in propelling the growths of both of its bioenergy and water treatment segments for those new markets.

The group decides to put on hold its expansion plan for its land in Pulau Indah Industrial Park, Klang which was initially targeted for a new manufacturing plant and warehouse. Currently, it focuses on conserving cash, probably to be used for any potential acquisition in either Malaysia or Indonesia should the opportunity arises.

There is no change to our core earnings estimates of RM21.8 million (+6.0% y-o-y) for FY19F and RM24.2 million (+11.1% y-o-y) for the forecast 2020 financial year (FY20F). Also, we take this opportunity to introduce our net earnings forecast for FY21F with a 9.6% y-o-y growth to RM26.5 million. Besides, its net profit margin is expected to remain steady at around 6% to 10% in line with its strategy of improving order book for its water treatment segment as well as bioenergy segment.

We maintain “hold” call on the company with a lower target price of 59 sen (from 63 sen). Our valuation is now pegged at 12.5 times FY20F price earnings (PE) ratio (from 13.5 times) to better reflect prevailing challenging outlook in the plantation sector as affected by weaker crude palm oil price. Our valuation is slightly lower than its mean PE of 17.6 times. — JF Apex Securities, April 15

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