• Keep NEUTRAL, with new MYR0.90 TP from MYR0.63, 0% downside. Boilermech’s 1QFY24 (Mar) results exceeded expectations, due to better performances from the bio-energy and solar energy segments. Valuation is fair, trading at 16.3x – in line with its historical P/E mean of 16x.

• 1QFY24 core profit of MYR6.5m (+103% YoY) exceeded expectations, at 29% and 28% of our and consensus FY24F. The deviations came from higher-than-expected PBT from the bio-energy and solar energy segments.

• Bio-energy, the biggest segment, posted 189% YoY PBT growth in FY24F, as revenue increased 30% YoY. This was likely due to normalising steel plate prices (-19% YoY), with higher delivery of projects with better profit margin. 1QFY24 PBT margin expanded to 10.3% (vs 4.6% in 1QFY23). Hence, we revised our FY24F-26F PBT margin to 9-11% (from 7-11%). We anticipate the segment’s 3-10% YoY revenue growth for FY24F-25F will be mainly contributed by the non-palm oil sector as we understand that most planters are focusing more on replanting and rehabilitation of their estates.

• Water treatment PBT plunged 76% YoY to MYR0.2m in 1QFY24, despite a 5% YoY uptick in revenue. We understand from management that 1QFY24 was challenging due to higher operating costs. As a result, PBT margin narrowed to 2.2% in 1QFY24, from 9.7% in 1QFY23. However, despite having the lowest margin among other segments, water treatment only made up 2% of 1QFY24’s PBT. We cut our FY24F-FY26F PBT margin to 4% (from 9-12%) and revenue growth to 5-6% (from 10%).

• Solar energy PBT spiked 1,051% YoY to MYR1.2m in 1QFY24, while revenue jumped 70% YoY – due to higher sales from the residential segment, on top of a reversal of provision for doubtful debts. As a result, its 1QFY24 PBT margin rose to 14% (vs 2% in 1QFY23). We believe the core PBT margin may be at a high single to low double digit given the normalisation of solar panel prices since end-2022. 1QFY24’s PBT contribution rose to 12% (up from 7% in FY23). Given the increased interest in green energy, we anticipate a 10% FY24F revenue growth for this segment, raising our margin assumptions to 9.5% (from 3-4%).

• We revise up FY24F-26F earnings by 13-26% after imputing higher revenue growth and PBT margins for the bio-energy and solar segments and lowering revenue growth and margin for the water treatment segment.

• Keep NEUTRAL with new MYR0.90 TP, based on a rolled forward 16x CY24 P/E. Our TP includes a 4% ESG discount given Boilermech’s ESG score of 2.8. Valuation remains fair, in line with its historical mean of 16x.

• Key risks to our call include raw material price fluctuations, disruptions in the supply chain and FX volatility.

Source: RHB Securities Research - 25 Aug 2023