This article first appeared in The Edge Financial Daily on November 9, 2017

Eonmetall Group Bhd
(Nov 8, 77.5 sen)
Maintain buy call with an unchanged fair value (FV) of 97 sen per share. We maintain our buy and FV of 97 sen but raise our forecasted financial year ending Dec 31, 2019 (FY19F) earnings by 18% (earnings for FY17F and FY18F remain unchanged), following a recent meeting with Eonmetall Group. 

Our FV is based on eight times FY18F earnings per share of 12.1 sen, a discount to the manufacturing sector’s average one-year forward price-earnings ratio of 10-11 times to reflect Eonmetall’s relatively small market capitalisation of less than RM150 million.

Our FY19F earnings upgrade forecast is premised upon the positive development in Eonmetall. For machinery and equipment, Eonmetall is currently in the final stage of negotiation with a public-listed company for the construction of several palm-pressed fibre oil extraction (PFOE) plants on a build-operate-transfer basis and expect to deliver the PFOE plants as early as first half (1HFY18). 

In addition, Eonmetall may secure additional two PFOE plants on an outright purchase basis which are expected to be delivered as early 1HFY18.

Eonmetall’s steel and trading division earnings are expected to grow stronger in 2HFY18 through its steel racking business. The newly formed subsidiary of Eonmetall, Constructor Asia Sdn Bhd (CASB), was incorporated recently to become contract manufacturer and distributor of the steel racking solution (within the Asia-Pacific region ex-Middle East) under the product flagship of Constructor from Europe. 

While Constructor’s products are predominantly focused on the Europe and Middle East regions, Constructor plans to expand its racking solution business to the Asia-Pacific region via collaboration with CASB, whereby Construction would confer licensing rights to CASB to manufacture and distribute its products. 

CASB is expected to begin its operation as early as 2HFY18 with an estimated annual revenue of RM50 million.

Eonmetall’s plans for overseas expansion are progressing well whereby a joint venture (JV) for steel racking manufacturing plant in Bangladesh to cater for steel racking products in the Middle East and North Africa (Mena) region will commence by 1HFY18; and a JV for steel processing plant in the United Arab Emirates to cater for downstream steel products in Mena will commence by 1HFY18.

Nevertheless, Eonmetall guided for a subdued quarter (Q) in 3QFY17 due to the lower sales recognition from its machinery and equipment (that is metalwork machine and solvent plant) and steel and trading (that is steel racking).

Notwithstanding that, we believe Eonmetall would deliver resilient earnings in FY17F as its 1HFY17 net profit came in at 73% due to lumpy billings.

We also like Eonmetall for the growing acceptance by palm oil millers in Malaysia and Indonesia for its oil extraction plants. Eonmetall enjoys good margins for these oil extraction plants in the absence of competition, coupled with the in-sourcing of inputs (steel products and metalwork machinery) used in the fabrication of these plants. — AmInvestment Bank, Nov 8