QL Resources Bhd
(Oct 5, RM4.75)
Recommend buy at RM4.68 with higher target price of RM5.28 (from RM5.20): QL proposes to acquire 40.51% equity interest in Boilermech Sdn Bhd for a total cash consideration of RM29.2 million.
Boilermech is primarily engaged in the business of design, manufacturing, installation and commissioning of biomass boilers (industrial and power generation machinery used to generate steam using biomass fuel exclusively for power generation and sterilisation of fresh fruit bunches in the palm oil industry), manufacturing and supply of boiler ancillary equipment and major repairs of existing boilers. Boilermech began operations in the early 1980s as a boiler part supplier and boiler repair company and has since established itself as an industrial boiler and boiler auxiliary equipment manufacturer. Aside from Malaysia, it has a presence in Indonesia and other palm oil producing countries such as Thailand, Myanmar, Ivory Coast and Cambodia. As at April, Boilermech recorded a revenue and net profit of RM98.8 million and RM12.3 million, respectively.
Based on Boilermech’s FY10 net profit of RM12.3 million, QL is acquiring its 40.5% stake in Boilermech at 5.9 times PER. While we are unable to comment on the valuation of the acquisition due to lack of peer comparison, we believe that QL has conducted sufficient feasibility studies on the prospects of the palm oil industry before proceeding with the acquisition.
Additionally, management has indicated that acquisition targets are constantly tabled to QL, but the group only thoroughly considers those which would benefit and suit QL the best. It is worth noting that QL is trading at a FY10 PER of 17.4 times, and therefore the acquisition is definitely value enhancing. QL intends to fund the acquisition via internally generated funds. As at June, the company had total cash of RM70.7 million.
The investment in Boilermech complements QL’s strategy to expand its renewable biomass energy business. We see this acquisition as a further extension of the group’s involvement in the business. The group has developed palm pellet technology that converts empty fruit bunches (EFB), a waste product of palm oil processing, into palm pellets which can be used as fuel for biomass plants. The acquisition also allows QL to: (i) acquire technology and know-how in agricultural biomass power and heat generation; and (ii) enhance its palm oil milling margin, as the group could possibly source boilers from its associate at a cheaper price. On the whole, we are positive on this acquisition as we believe the prospects of the biomass energy sector are bright given the increasing demand for renewable energy due to the high cost and shortage of fossil fuel.
We raise our FY11 and FY12 earnings forecast by 2.7% to 3.1% to RM126 million and RM139.2 million respectively, taking into account the associate contribution from Boilermech and reduced interest income. Our target price is raised to RM5.28 from RM5.20. — OSK Investment Research, Oct 5
This article appeared in The Edge Financial Daily, October 6, 2010.