- Initiating coverage with a NEUTRAL and MYR0.62 TP, 5% downside. Boilermech’s technical expertise gained through years of experience serving palm oil planters provides it a competitive edge over other general industry boiler manufacturers. However, given the margin compression due to elevated costs and product mix, valuation is fair – trading at 15.2x FY24F (Mar) P/E – largely in line with its historical P/E mean of 14.7x.
- Palm oil industry specialisation. Starting out as a biomass boiler design and manufacturer, Boilermech has gained the expertise and technical knowledge to provide EPC services tailored to palm oil players given the years of experience serving industry clients. Its main offerings are: i) Palm oil mill boilers, and ii) palm oil mill effluent (POME) and biogas capture systems.
- Opportunities arise on increasing ESG awareness. As companies are pressured to run sustainable operations, this positively impacts Boilermech in our view, as the company offers environmental-friendly solutions across all its bio-energy, water treatment, and solar energy segments, eg biomass boilers, POME treatment solutions, and solar photovoltaic (PV) systems.
- Privatisation on the cards? While QL Resources (QLG MK, NEUTRAL, TP: MYR5.31) decided during a Mandatory General Offer (MGO) in 2020 that it wanted to maintain Boilermech’s listing status, we believe the latter’s businesses are providing ESG-related solutions, which makes it enticing. Hence, to have a greater share of contributions from this should be something worth considering for QLG, in our view. Therefore, we do not rule out the possibility of another privatisation offer for Boilermech from QLG in the future, especially given the current share price is >30% below the previous MGO offer price.
- Earnings forecasts. We anticipate FY23F to be a challenging year, given increased raw material prices, changes in the product mix, and labour shortages. However, we foresee some improvements from FY24F coming from margin enhancement, in anticipation of better supply chain management and normalisation of raw material prices. We project a 7% decline in FY23F net profit while FY24F-25F earnings are expected to grow by 23-28%. All in, we estimate a 3-year earnings CAGR of 13.5%.
- Fair valuation. The stock is currently trading at 15.2x FY24F P/E, in line with its 5-year historical P/E mean. We believe this is fair, given the challenging environment and our expectations that ROAE will remain low at the 7-10% levels. We base our TP on a P/E target of 15x FY24F EPS. We have also imputed a 4% ESG discount into our TP, as per our in- house proprietary methodology.
- Key risks to our call include raw material price fluctuations, FX fluctuations, and disruptions in the supply chain.
Source: RHB Research - 7 Oct 2022
