This article first appeared in The Edge Financial Daily on February 25, 2019

Boilermech Holdings Bhd
(Feb 22, 58 sen)
Maintain hold with a target price (TP) of 63 sen: Boilermech Holdings Bhd’s (Boilermech) third quarter of financial year 2019 (3QFY19) net profit was RM5.8 million, up 5.3% quarter-on-quarter (q-o-q) and 16.1% year-on-year (y-o-y). However, revenue tumbled 7.5% q-o-q and 8.1% y-o-y respectively.

The group’s 9MFY19 revenue and net profit improved 3.0% y-o-y and 12.3% y-o-y respectively. The encouraging growth was underpinned by better performance in both the bio-energy and water treatment segments.

The 9MFY19 net profit of RM16.3 million was within our and consensus expectations, meeting 74.8% and 75.8% of the full-year net earnings forecasts respectively.

Group revenue and profit before tax (PBT) deteriorated by 7.5% q-o-q and 6.5% q-o-q respectively in 3QFY19. The uninspiring result was due to a lower order book secured in both segments. The bio-energy division’s revenue and PBT contracted 8.7% q-o-q and 0.5% q-o-q respectively, while the water treatment division’s revenue and PBT tumbled 1.6% q-o-q and 39.1% q-o-q respectively.

Boilermech’s revenue slumped 8.1% y-o-y, down 12.3% y-o-y, due to lower revenue in the bio-energy division. However, revenue in the water treatment division improved 17.2% y-o-y, buoyed by higher project sales and delivery. Besides, group PBT surged 5.8% y-o-y/+1.9 ppts, thanks to the better margin in the bio-energy segment which was up 12.3% y-o-y and 4.8 percentage points (ppts).

Cumulatively, Boilermech’s revenue improved 3.0% y-o-y to RM162.5 million, mainly underpinned by higher revenue in the water treatment segment of 21.3% y-o-y and minor revenue in the bio-energy segment of 0.2% y-o-y. Besides, the group’s operating profit margin expanded by 1.1 ppts due to the better margin in both the bio-energy and water treatment segments, up 1.8 ppts and 3.3 ppts respectively.

Exports sales accounted for 59.9% of Boilermech’s revenue in 9MFY19 against 9MFY18’s 53.6%. We believe most of the contracts secured were mainly from Indonesia.

Looking forward, the group remains cautious on its business performance following lower order book secured in this financial year. Besides, we expect the group to continue facing some headwinds in the palm oil industry in relation to lower planting activities for the Malaysian market, lower production yield for Indonesian market as well as environmental and social issues which affect planters’ upstream activities.

Therefore, we retain our earnings forecasts for FY19 and FY20 at RM21.8 million and RM24.2 million respectively and maintain “hold” as we rolled over our valuation to FY20. Our valuation is now pegged at 13.5 times FY20F, forecasted price-to-earnings ratio (from 16 times ) to better reflect the 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 17.6x. — JF Apex Securities, Feb 22