KUALA LUMPUR (Dec 27): Kenanga Research believes Boilermech Holdings Bhd is strengthening its position in the renewable energy industry by taking full ownership of Tera VA Sdn Bhd.

In a note on Tuesday (Dec 27), the research house cited that Boilermech is buying out the remaining 35% stake in Tera for RM8.2 million cash, translating into a price-earnings ratio (PER) of about nine times for the financial year ending March 31, 2023 (FY2023), based on its forecast.  

“We are mildly positive that this move will strengthen its presence in the renewable energy space,” it said. 

Kenanga maintained its target price (TP) of 83 sen and "outperform" call on Boilermech.

It noted that the Tera deal comes with a profit guarantee of RM4.2 million over an unspecified period of time.  

“Also, upon the completion of the transaction, the vendor will continue to run the business as a professional manager. The deal values Tera in its entirety at RM23.4 million,” it added.  

"Based on the FY2023 net profit of RM2.7 million for Tera, this translates into an acquisition PER of about nine times, which is at a discount to our valuation basis of 15 times forward earnings for a similar company, Samaiden Group Bhd. "

A point to note is that Boilermech first acquired 60% of Tera in 2020 for RM2.5 million cash, when the solar engineering, procurement, and construction contractor was still in its infancy.  

The latest acquisition will reduce Boilermech's net cash of RM62.7 million as at end-September to RM54.5 million. 

Kenanga said the acquisition will boost Boilermech’s FY2023-24 net profit by 3-4% (with the elimination of Tera’s minority interests, partially offset by interest income foregone of RM8.2 million). 

“We continue to like Boilermech for: i) the current capital expenditure upcycle of palm oil millers on the back of sustained firm crude palm oil prices; ii) the long-term investment and upgrading of palm oil milling assets driven by growing environmental, social and governance awareness among palm oil millers; and iii) its strong customer base with reputable names in the industry, such as Kuala Lumpur Kepong (KLK), Wilmar, Sime Darby, Boustead and Tradewinds,” it added. 

Kenanga said its TP of 83 sen is based on 16 times FY2024 PER, at a 20% premium to the historical one-year forward PER of 13 times of boiler makers.