Strong growth seen for Eonmetall’s racking system ops

TheEdge Wed, Mar 20, 2019 10:17am - 5 years View Original


Eonmetall Group Bhd
(March 19, 38 sen)
Maintain buy with a reduced fair value (FV) of 61 sen:
We cut our financial years 2019 (FY19) and FY20 forecast earnings by 29% and 12% respectively; and reduced our FV by 29% to 61 sen from 87 sen, but maintained our “buy” call. Our new FV is based on eight times the revised FY19F earnings per share, at a discount to the manufacturing sector’s average one-year forward price-earnings ratio of 10 to 11 times to reflect Eonmetall Group Bhd’s relatively small market capitalisation.

 
The earnings downgrade is largely to reflect a slight delay in the commencement of Eonmetall’s build-operate-own-transfer (Boot) palm fibre oil extraction (PFOE) project with FGV Holdings Bhd; and the Constructor racking system roll-out. During a recent meeting, Eonmetall guided for maiden profits from FGV’s Boot PFOE plants to only come in during the fourth quarter (4Q) of FY19, versus 1QFY19 that it guided previously. The maiden profits will come from the first three of the total six units. Meanwhile, Eonmetall expects the remaining three units to start operations in FY20, versus the second half of FY19 that it had previously expected. These are mainly due to its inability to secure the sites required due to delays in signing the land lease agreements.

To recap, Eonmetall in 2018 entered into a Boot arrangement with Felda Palm Industries, a 72%-owned subsidiary of FGV, entailing Eonmetall to construct, commission, operate and maintain six PFOE plants alongside six Felda Palm’s existing palm oil mills on a profit-sharing basis over 10 years. Upon the six PFOE plants’ successful implementation, the same arrangement may be extended to another four palm oil mills. Also to recap, we estimated that each plant will generate an annual turnover of RM4 million, on 2,000 tonnes of residual palm oil recovered at an average crude palm oil price of RM2,000 a tonne, and a profit of about RM1 million after accounting for operating costs and depreciation.

The recognition of fabrication profits from the six plants has not been affected with the first three units in FY18 and the remaining three units in FY19 — this is as the point of profit recognition is fabrication works of the plants in the yard. To recap, we estimated that each of the plants, priced at RM8.8 million, could generate RM2 million to RM3 million in one-off fabrication profits.

On the other hand, a delay in the Constructor racking system roll-out was largely due to a product certification by the principal, as there was an inconsistency concerning the strength of certain parts of the racking system. Eonmetall said the issue has largely been resolved and is confident in obtaining the certification within weeks to enable the first product shipment in April 2019.

To recap, the venture is a result of a strategic partnership with Gonvarri Material Handling AS, whereby Eonmetall had obtained the licensing rights to manufacture and distribute steel racking solutions under the product flagship of Constructor from Europe for an initial five-year term, with the option to renew for a further five years. The strategic partnership allows Gonvarri and Eonmetall to expand their mutual plans to manufacture and distribute Constructor steel racking solutions across Asia-Pacific on an equal profit-sharing basis.

Our forecasts now assume Eonmetall’s racking system business to generate about RM100 million in sales in FY19F — with an additional brand, the Constructor — a whopping 50% increase from RM66.8 million in FY18, with only the existing Eonmetall brand. We still like Eonmetall for the growing acceptance by palm oil millers in Malaysia and Indonesia for its solvent oil extraction plants. Eonmetall enjoys good margins for these plants in the absence of competition, coupled with the insourcing of inputs — steel products and metalwork machinery — used in the fabrication of these plants. Its solvent oil extraction plant business’ growth will come from the concession model’s introduction. The model, attractive to palm oil mill owners, requires a minimal capital outlay from them as Eonmetall will fund the construction cost of the solvent oil extraction plant in exchange for profit-sharing. Eonmetall’s racking system business is also poised for tremendous growth underpinned by Constructor products. — AmInvestment Bank, March 19

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