Sime Darby announced that it is acquiring Onsite Rental Group Ltd (Onsite Group), a market-leading provider of business-to-business (B2B) equipment rental solution for a cash consideration of AUS635.0m (RM1,915.9m). The proposed acquisition is expected to be completed by 4QFY23. Based on our preliminary estimates, the potential new earnings stream from Onsite Group could be offset by the additional funding cost required for this acquisition. However, the acquisition is expected to strengthen the Group’s participation across the industrial equipment rental spectrum and offer greater access to construction, energy and mining industries growth in Australia. We keep earnings estimates unchanged at this juncture and maintain our Neutral call and TP of RM2.37.

• Background. Onsite Group is one of the largest B2B equipment rental service providers in Australia, servicing primarily the mining and construction industries. It has 39 branches throughout the country with an extensive presence in Western Australia and Queensland. It has a large and diverse fleet of over 60,000 rental assets, span over access, power and tool equipment, site accommodation, materials-handling, industrial tools and small-scale earthmoving and compaction.

• Financials. The purchase consideration is arrived at FY22 EV/EBITDA of 5.2x, in-line with the acquisition of Salmon Earthmoving in 2021 at EV/EBITDA of 5.6x. Onsite Group achieved an EBITDA of AUD121.7m (RM367.2m) and net profit of AUD33.0m (RM99.6m) in FY22, on the back of revenue of AUD302.1m (911.5m). It is supported by a total asset base of AUD537.7m (RM1,622.3m) as at 30 June 2022.

• Earnings contribution. The growth prospect of Onsite Group appears to be promising given positive outlook for the construction, energy and mining sectors in Australia, underpinned by committed government stimulus spend on infrastructure projects, new gas plant expansion projects and expanding levels of tonnage throughput across mineral commodities. However, we do not expect any meaningful earnings contribution from Onsite Group due to huge funding required as the acquisition is intended to be financed entirely through external borrowings. Benefits from synergies are not likely to be reaped immediately.

Source: PublicInvest Research - 3 Mar 2023