This article first appeared in The Edge Financial Daily, on June 6, 2016.

KUALA LUMPUR: Things are looking up for Penang-based Eonmetall Group Bhd. The metalwork and industrial process machinery and equipment manufacturer is seen as a major beneficiary of the rebound in the palm oil industry, given the increase in demand for new milling equipment.

According to analysts, a competitive advantage Eonmetall has over its competitors is its palm oil fibre extraction technology, which can increase the extraction of oil from palm fibre by using a combination of mechanical and chemical processes. The company holds the pioneer status for this technology until 2018. It also owns the exclusive patent for a solvent extraction technique for mesocarp fibres until 2023 to 2024 in Malaysia, Indonesia and India.

Palm fibre is a palm fruit waste product that is generally burnt to generate steam or thrown away.

Its managing director and chief executive officer Yeoh Cheng Chye said Eonmetall, which delivered three to five units per year of its patented solvent extraction plant (SEP) on average during the global palm oil boom from 2010 to 2012, expects to receive at least two new SEP orders in the current financial year ending Dec 31, 2016 (FY16).

“As long as palm oil prices hover around RM2,200 per tonne, it will be a good price for our SEP. The potential market is huge, [as] there are more than 1,350 mills in Malaysia and Indonesia. So far, we [have] only managed to build 19 SEPs, which constitute a market share of less than 10%,” he told The Edge Financial Daily in an interview.

The SEP business has helped the company to turn around, posting a net profit of RM5.22 million in FY15, compared to a net loss of RM3.01 million in FY14. Revenue grew 24% to RM79.66 million, out of which half was derived from its patented SEP jobs.

For the first quarter ended March 31, 2016 (1QFY16), Eonmetall recorded a net profit of RM11.85 million, from a net loss of RM155,000 in 1QFY15, as its revenue more than doubled to RM32.9 million, from RM15.38 million a year ago.

Yeoh is confident that his net profit target of up to RM20 million in FY16 is achievable.

“In 1QFY16, we achieved more than 50% of what we had projected. So, it is not something we cannot achieve for the remaining three quarters.

“Although [our] 2QFY16 net profit won’t be as high as that achieved in 1QFY16, but achieving 50% of what we achieved in the first quarter is possible,” he said.

Investors reacted positively to the strong results and sent Eonmetall’s shares up 36% or 16.5 sen in a day to 63 sen on May 25, its highest closing price since June 2008. Last Friday, it remained high to close at 63 sen. Year to date, the stock has surged 114%.

Yeoh noted that the company had not recognised some 40% of its current SEP order book and this will be mostly recognised in the second quarter of this year.

Meanwhile, Eonmetall, whose SEP market is mainly dominated by the private sector, is looking to tap into the government-linked planter market via potential joint ventures (JVs) or build-operate-transfer (BOT) projects.

“Traditionally, we sell plants. Today, we are looking at potential JVs and BOT projects. We are in talks with a government-linked company (GLC), which potentially can afford up to six SEP units,” said Yeoh, adding that it expects to secure more GLC clients to invest in its SEP units and help improve their oil extraction rates.

Currently, Eonmetall’s in-house capacity is able to build eight to 10 plants per year, with a selling price of up to RM10 million each.

Yeoh said the company is also looking to move into the midstream market and set up its own palm oil mill in two years, starting with Indonesia, the world’s largest palm oil producer and exporter.

“We believe in diversification, so we are not too dependent on a particular industry. Today, you have seen many mill suppliers become mill operators. We hope that one day, we can also become an operator,” he added.

Yeoh is of the view that when the company becomes a mill operator, it will bring in recurring income, although the margin won’t be as high as that of an equipment supplier.

For starters, Eonmetall in 2012 formed a JV with Koperasi Unit Desa to explore the viability of the business. Eonmetall holds a 88% stake in the JV.

According to Yeoh, the JV has not been taken off in the last few years because of political uncertainty in Indonesia, and the investment of up to RM100 million is significant for Eonmetall.

However, as the Indonesian presidential election is now over, coupled with the fact that the company’s gearing ratio is at 0.33 times, which is considered low among steel players, Yeoh believes it is now time for Eonmetall to initiate the plan.

Unlike other steel players, Eonmetall only made losses in FY14, due to high provision for steel amid a downturn. This was attributed to the group’s well-balanced contributions from steel and plantation machinery.

Yeoh emphasised that the company’s steel product and trading activity segment had made profits in the last six consecutive quarters, regardless of whether the market was good or bad. If the division contributes the same amount of profit as in the last few quarters, the company is already on track to achieve the RM20 million net profit target in FY16.