IJM has entered into a condition subscription agreement with Pestech International (Pestech) for the subscription of 800m ordinary shares, representing 44.8% of the enlarged share capital (excluding treasury shares) in Pestech for RM124m or RM0.155 per subscription share via cash and borrowings. Having said that, the Group has indicated that it is not in their interest to acquire Pestech whole. Nonetheless, we estimate that this will raise IJM’s net gearing from 0.23x to 0.24x assuming the subscription will be financed via 50% debt and cash. Given IJM’s 44.8% stake which qualifies Pestech as its associate, there would be immediate earnings impact to the Group from 2HFY24 onwards. Our preliminary estimation suggests Pestech to contribute 3-4% annually on average to the Group’s bottomline, assuming a conservative profit margin of 5% and RM300m orderbook replenishment assumption per annum. We deem the investment in Pestech may present a synergistic opportunity to IJM in complementing its competency in rail engineering. However, we do not discount the possibility of further capital injection from IJM should Pestech continues to be bogged down by cashflow challenges. To note, Pestech has an alarmingly high net gearing at 1.6x as of 3QFY23. Overall, we are neutral on this development pending further clarity in today’s analyst briefing. All said, we are leaving our forecasts unchanged for now. We retain our Outperform call and SOTP derived TP of RM2.10, pegged at 15x PER sector average.

• About Pestech. The company specialises in high voltage electircial transmission as well as rail electrification and signalling. Pestech has regional presence in Cambodia, Philippines and Thailand as well as in Papua New Guinea, West Africa and Middle East i.e: Iraq.

• Rationale of the share subscription. At a glance, the proposed share subscription in Pestech may present a synergistic opportunity to IJM given both companies have strong track record in rail engineering. We view this investment a window for IJM to be a fitter contender in the MRT3 systems package worth c. RM4.5bn.

• Deeply discounted price. The subscription price of RM0.155 per share represents 53% discount to Pestech’s market value of RM0.295 per share as of closing yesterday. 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. The investment would be funded via cash and borrowings, we understand. No liabilities will be assumed from this exercise. Post-acquisition, we estimated that IJM’s cash pile will be reduced by 2.2% to RM2.7bn (assuming 50% debt and cash). Meanwhile, the Group’s net gearing is expected to climb to 0.24x from 0.23x (as of IJM’s 4QFY23).

• Our take. We deem the investment in Pestech may present a synergistic opportunity to IJM in complementing its competency in rail engineering. However, we do not discount the possibility of further capital injection from IJM should Pestech continues to be bogged down by cashflow challenges. To note, Pestech has an alarmingly high net gearing at 1.6x as of 3QFY23. Overall, we are neutral on this development pending further clarity in today’s analyst briefing.

Source: PublicInvest Research - 25 Jul 2023