CEO Morning Brief

IJM's Stake Buy in Pestech Expected to Yield Positive Synergies

Publish date: Wed, 26 Jul 2023, 08:43 AM
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TheEdge CEO Morning Brief

KUALA LUMPUR (July 25): The emergence of IJM Corp Bhd as the largest shareholder of Pestech International Bhd is expected to yield positive synergies for both companies, according to analysts.

The proposed deal for IJM Corp to buy 44.83% of Pestech via a subscription of 800 million shares in Pestech worth RM124 million, or 15.5 sen per share, was announced on Monday (July 25).

“IJM’s stake in Pestech may enable both parties to tender for infrastructure jobs beyond their normal scope (civil construction for IJM and rail and electrification systems for Pestech), particularly civil and system-related packages for the Klang Valley Double Track 2, the Penang Light Rail Transit, and possibly the Kuala Lumpur-Singapore High-Speed Rail,” said RHB Research analyst Adam Mohamed Rahim in a note on Tuesday (July 25).

IJM could also expand its geographic reach, as Pestech operates in markets such as Cambodia, the Philippines, Thailand, and Papua New Guinea, Adam added.

Public Investment Bank (PublicInvest) said as IJM’s 44.83% stake buy in Pestech would qualify Pestech as its associate, there would be an immediate earnings impact for IJM from the second half of 2024 (2HFY2024) onwards.

“Our preliminary estimation suggests Pestech to contribute 3-4% annually on average to the group’s bottom line, assuming a conservative profit margin of 5% and RM300 million order book replenishment assumption per annum. We deem the investment in Pestech may present a synergistic opportunity to IJM in complementing its competency in rail engineering,” said PublicInvest.

“However, we do not discount the possibility of further capital injection from IJM should Pestech continue to be bogged down by cashflow challenges. To note, Pestech has an alarmingly high net gearing at 1.6 times as of 3QFY2023,” PublicInvest added.

Overall, PublicInvest is neutral on this development pending further clarity. All said, the research outfit has retained its “outperform” call on IJM with a target price of RM2.10

Kenanga Research is positive on this latest move by IJM as it concurred that this deal gives IJM an immediate presence in the rail electrification space, strengthening and widening its potential roles in impending mega rail projects such as Mass Rapid Transit line 3 (MRT3), Penang LRT and KL−Singapore high-speed rail (should the project be approved).

“Assuming Pestech is to only break even, the financing cost on the RM124 million investment in Pestech will dilute IJM’s FY2025 earnings by 1.5% on a ceteris paribus basis, but will easily be compensated with a bigger role in future mega rail projects as mentioned,” Kenanga Research noted.

Kenanga Research said the RM124 million capital outlay will raise IJM’s net debt of RM2.51 billion as at end-March 2023 to RM2.63 billion and net gearing of 0.26 times for the same period to 0.27 times, which it believes is still highly manageable.

Kenanga Research has maintained its “market performance” call on IJM with an unchanged target price of RM1.67.

Acquisition is fair and reasonable

TA Securities, which has a neutral view on the proposed acquisition pending further clarity, said the acquisition price of 15.5 sen per share based on a price-to-book (P/B) ratio of 0.4 times is fair and reasonable. It maintained its “buy” call on IJM with an unchanged target price of RM1.85.

RHB Research’s Adam also agrees, as he believes the discount is fair and reflects Pestech’s losses after tax recorded over the past four consecutive quarters amid lower turnover and higher operating costs.

RHB Research has kept its “neutral” call on IJM and an unchanged target price of RM1.59.

The purchase price of 15.5 sen per share represents a discount of 47.46% over Pestech’s last traded price of 29.50 sen, and a discount of 48.98% over the five-day volume weighted average market price of 30.38 sen up to July 21.

The acquisition will result in IJM becoming Pestech's largest shareholder with a 44.83% stake in its enlarged share capital. As per regulatory requirements, IJM would be obligated to make a mandatory takeover offer for the remaining Pestech shares and warrants. However, IJM said it does not intend to proceed with this obligation and will seek an exemption from the Securities Commission Malaysia, after Pestech obtains its shareholders' approval.

Currently, Pestech’s main shareholders are its chairman Lim Ah Hock (32.51%) and its managing director-cum-chief executive officer Paul Lim Pay Chuan (19.32%).

The completion of the transaction is expected in the fourth quarter.

Pestech stock was heavily traded on Tuesday following the news. The stock also faced heavy selldown as it dropped as much as 20.33% or six sen to a low of 23.5 sen in morning trade but was hovering at 27 sen at the noon break, still down by 2.5 sen or 8.47%. At 27 sen, the company is valued at RM268 million.

The stock is the seventh most active traded counter on Bursa Malaysia, with 34.06 million shares changing hands so far.

Meanwhile, IJM shares were traded one sen or 0.68% higher to RM1.48, which translates to a market capitalisation of RM5.40 billion.

Read also:
Pestech heavily traded as share price slumps up to 20%
IJM Corp to acquire 45% stake in Pestech International for RM124 mil

Source: TheEdge - 26 Jul 2023

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