Eonmetall Group Bhd
(Feb 10, 64.5 sen)
Maintain buy call with a lowered fair value (FV) of 78 sen: We cut our 2016, 2017 and 2018 financial year forecasts (FY16F, FY17F, and FY18F) by 30%, 26% and 26% respectively, and FV by 26% to 78 sen but maintain our “buy” call following a recent meeting with Eonmetall Group Bhd. Our FV is based on an eight times revised FY17F earnings per share of 9.7 sen, at a discount to the manufacturing sector’s average one year forward price-earnings ratio (PER) of 10 to 11 times to reflect Eonmetall’s relatively small market capitalisation.

Eonmetall guided for a subdued fourth quarter of FY16 largely due to a spike in prices of hot-rolled coils, the input in the production of cold-rolled coils in end-2016; a higher-than-expected provision for 2016 staff bonus (on the back of a bumper year in terms of profit); a negative adjustment to inventory following a recent stocktaking exercise; and slower-than-expected progress billings from certain residual oil extraction plant maintenance and upgrading contracts.

Meanwhile, our downgrade of FY17F and FY18F is premised upon a new assumption that going forward, most of Eonmetall’s residual oil extraction plant projects will be carried out on a build-operate-transfer (BOT) basis. 

Eonmetall’s profits will be effectively backloaded via the BOT model. Under the BOT model, upon commissioning of the plant, Eonmetall gets a cut of the profit from the sale of the oil produced, which will recur over a number of years. On the other hand, an outright sale of a plant to a third party gives Eonmetall an instant and one-off lumpy construction profit.

We understand that Eonmetall is currently in negotiations with a publicly listed company to build several residual oil extraction plants on a BOT basis. 

It is also in talks with an existing client (a government agency) for the order of its second residual oil extraction plant, and a new customer (a publicly listed plantation company) for the contract of its first ever residual oil extraction plant.

We now project Eonmetall’s earnings to only more than double in FY16F driven largely by residual oil extraction plant construction profits, and rise by 15.1% in FY17F and 9.9% in FY18F. Generally, steel products, metalwork machinery and residual oil extraction plants, each contributes about a third to Eonmetall’s group earnings.

We continue to like Eonmetall for its tremendous growth potential in the residual oil extraction segment, backed by its patents for the technology in Malaysia, Indonesia and India, a huge addressable market for the technology in the region, and high margins as it sources inputs for the residual oil extraction plant internally. — AmInvestment Bank, Feb 10