We came away from IJM’s analyst briefing feeling largely neutral to slightly positive. Market was rather indifferent to the proposed share subscription, IJM shares was up by 2% from RM1.47 as of July 25 last traded price. While the Management is cooingly sanguine on the merits of the proposed shares subscription in Pestech, we opined that the synergy between the two companies provide mutual benefits – IJM will be able to leverage on Pestech’s technical know-hows and capabilities in energy transmission and rail electricfication & signalling whereas Pestech could resuscitate its ongoing projects with IJM’s new capital injection. However, post briefing, we expect earnings impact to be muted – we reckoned that FY24-26F will be the earnings recovery years for Pestech. All in all, we maintain our neutral stance on this development, given that there is no significant impact to the Group’s earnings and balance sheet. We retain our forecasts and Outperform call with an unchanged SOTP derived TP of RM2.10, pegged at 15x PER sector average.

• Deal details. IJM has entered into a conditional subscription agreement with Pestech for the subscription of 800m ordinary shares, representing 44.8% of the enlarged share capital (excluding treasury shares) for RM124m or RM0.155 per subscription share funded via cash and borrowings. The Group has indicated that it is not in their interest to acquire Pestech whole and no liabilities will be assumed from this exercise. The subscription price of RM0.155 per share represents 47% discount to Pestech’s market value of RM0.295 per share as of closing on July 25. Notwithstanding, in contrast to Pestech’s NTA of RM0.73 per share (as of Pestech’s 3QFY23), the subscription price translates to a steep 79% discount.

• IJM and Pestech to operate as separate entities. We concluded that there would be little-to-no participation from IJM in Pestech’s day-to-day operations. However, IJM divulged that they will have up to two seats in Pestech’s board. In addition to that, IJM will act as a consultant to restructure and alleviate the target company’s balance sheet as well as implementing stronger governance and risk management frameworks.

• Our view. We opined that the synergy between the two companies provide mutual benefits – IJM will be able to leverage on Pestech’s technical know hows and capabilities in energy transmission and rail electricfication & signalling whereas Pestech could resuscitate its ongoing projects with IJM’s new capital injection. We think the crucial point lies in Pestech’s turnaround strategy. However, post briefing, we expect earnings impact to the Group’s bottomline to be muted – we reckoned that FY24-26F will be the eanrings recovery years for Pestech.

Source: PublicInvest Research - 26 Jul 2023