Boilermech margins seen to improve
Boilermech Holdings Bhd’s operating environment is seen to be normalising as the pandemic moves towards an end, says Kenanga Research.
The group’s margins are also improving as the cost of key inputs, particularly steel, eases, it added.
Kenanga Research in a note to clients said, “We came away from a recent engagement with Boilermech feeling reassured of its improving outlook.”
Boilermech is principally engaged in biomass boiler design and manufacturing.
It operates through three segments, namely, bio-energy, water treatment and solar energy.
The research house said the group acknowledged that it was challenging to pass on higher costs to end-customers.
“This is because Boilermech typically enters into fixed-price contracts with them, while the cost of inputs fluctuates amid persistent supply-chain disruptions,” it added.
Previously, the group suffered margin compression, when the cost of inputs such as steel soared during the initial global economic reopening period, spurring demand which overwhelmed supply.
The good news is that the price of steel has eased, paving the way for Boilermech’s margin recovery from the third quarter of financial year 2023 (3Q23) onwards.
“However, the same cannot be said for its solar segment, given the still elevated price of solar photovoltaic panels globally amidst persistent supply-chain disruptions,” it noted.
The research house said Boilermech group sensed that its customers were still committed to investing in new boilers or retrofitting the old ones as “they still enjoyed a strong cash flow at the current crude palm oil (CPO) prices, which are still very elevated by historical standards.”
This is further supported by the growing environmental, social and governance (ESG) awareness among palm oil millers, driving new demand for environment preservation solutions such as better water treatment systems.
It cited that the group’s new boiler manufacturing facility in Surabaya, Indonesia, has already achieved an utilisation rate of 60% at the moment.
“At present, the plant largely supplies to the East Java region, while its Malaysian operation will continue to supply to the other parts in Indonesia,” Kenanga Research said.
Meanwhile, the group sees tremendous opportunity for its water treatment systems in Indonesia that are virtually untapped currently.
“We believe Boilermech’s diversification into Indonesia is a step in the right direction given the still growing plantation industry in Indonesia versus a more matured one in Malaysia,” added the research house.
It has maintained its forecast on the group with a target price of 90 sen based on 16 times the financial year 2024 price-to-earnings ratio.
This reflects the current capital expenditure upcycles of palm oil millers on the back of elevated CPO prices, the additional opportunities driven by the growing ESG awareness among palm oil millers and its strong customer base with reputable names in the industry.