The Group (HGB) announced yet another acquisition, its fourth for the year, as it continues diversifying further across the industrial chemical space. The current transaction sees HGB paying RM13m for the entire equity stake in Tufbond Technologies Sdn Bhd (TTSB). We keep our earnings estimates unchanged pending completion of the deal, even as the TTSB acquisition comes with an annual RM2m net profit guarantee over the next 3 years. We lift our target price to RM1.71 (RM1.42 previously) on a slightly higher 30x multiple to an unchanged FY22 earnings. We deem the higher multiple as fair given 1) the robust earnings growth from its acquisition-related activities (>50%), underpinned by its steadily-growing organic earnings from market leadership in the domestic agrochemical space, and 2) management’s ability in continuously enhancing shareholder value. Our Outperform call is retained for the longer term despite the limited near-term upside to our current TP which has not accounted for contributions from its more recent acquisitions.
- Acquisition 1: The Chempro Group of Companies was acquired for RM138m with a cumulative 3-year profit guarantee of RM39m, pricing the transaction at ~11x earnings multiple. The Group has a track record of operating in Singapore, Thailand, Indonesia, Brunei, Hong Kong, Taiwan and China, in addition to Malaysia, and provides niche specialty chemical products for cleaning, hygiene and the food industry.
- Acquisition 2: The Nobel Group of Companies was acquired for RM105m with a cumulative 3-year profit guarantee of RM42m, pricing the transaction at 7.5x earnings multiple. The Group manufactures and supplies chemical derivatives, coating and related products. It provides high performance custom-made anti-tack rubber lubricant and coatings for the rubber industry.
- Acquisition 3: A 45% equity interest in Enra Kimia Sdn Bhd (EKSB) was acquired for RM24.5m. EKSB and its subsidiaries supply specialty chemicals, catalysts and odorants, as well as provide ancillary services for these products to the oil and gas and petrochemical industries. Countries of coverage are Malaysia, Australia and New Zealand. More importantly, it is licensed to conduct business with the Petronas Group of Companies.
- Acquisition 4: The purchase is priced at 6.5x earnings multiple. TTSB manufactures various types of synthetic latex polymers used for paint, waterproofing, coatings, inks, tapes, labels, paper binders and textile.
- Effects of transactions: Gearing of the Group will increase to 1.2x with financing facilities recently raised for the various acquisitions. Expected to cost about RM6m per annum in interest servicing cost, we are not overly perturbed given the strong operational cash flows of the expanded Group
Source: PublicInvest Research - 5 Nov 2021