• MYR0.38 FV, based on 16x FY25F P/E. Elridge Energy intends to raise MYR101.5m from its IPO, mainly to fund its capacity expansion plan and working capital. Our 16x P/E target was obtained after benchmarking against the Bursa Malaysia Industrial Products and Services (KLPRO) Index. Our 3- year earnings CAGR of 29.5% is premised on growing biomass fuel demand given the increasing commitment to greener energy.

• Elridge is principally involved in the manufacturing and trading of biomass fuel products, particularly palm kernel shells (PKS) and wood pellets. Its customer base mainly comprises biomass fuel product trading companies that sell to end-users, in particular manufacturers that require industrial boilers for generation of heat or energy, and biomass power plant operators.

• Expansion plans. The group has earmarked MYR68.1m of its IPO proceeds to expand its production capacities in Kuantan, Pasir Gudang, and Lahad Datu. This involves acquisition of new land, construction of factory and warehouse as well as purchasing new machineries. The proposed expansion would enhance Elridge’s production capabilities for the business segment to meet expected future demand growth and reduce turnaround time when multiple large orders are secured at the same time.

• Forecasts. Given the strong demand of biomass energy, we forecast Elridge’s revenue to grow at a 3-year CAGR of 12%, primarily driven by the manufacturing of PKS segment. This growth is supported by the operation of the new Kapar facility, which adds an additional 240,000MT of capacity. Looking ahead, the group plans to further expand its capacity by adding another 720,000MT through three new facilities. These expansions are expected to significantly bolster its production capabilities and contribute to sustained revenue growth. We anticipate its earnings to grow at a 3-year CAGR of 29.5% with margins expected to increase slightly, supported by the group’s continued focus on regional markets.

• Valuation. We ascribe a 16x P/E to the group’s FY25F earnings to arrive at a Fair Value of MYR0.38. Our target PE is in line with the 5-year historical mean P/E of KLPRO Index of 16x. We benchmark the target P/E against KLPRO Index considering the nature of Elridge’s business which falls under the industrial segment. The 16x P/E ratio is at a discount compared to the weighted industry average of the renewable energy (RE) players, which we consider fair given that Elridge is not involved in actual energy generation. It does benefit from the growing demand for feedstock, driven by the increasing focus on bioenergy.

• Key risks include weaker-than-expected orders from existing and prospective customers, adverse fluctuations in raw material prices, and FX rates.

Source: RHB Securities Research - 9 Aug 2024