■ SAMEE proposes to acquire Aviatron for RM203m and settle the latter’s shareholder loans amounting to RM201m (81x FY3/23 P/E).

■ The proposed acquisition is earnings dilutive but a recovery in the aerospace business to pre-Covid-19 levels would make this an attractive acquisition.

■ Maintain Hold. We see its FY3/25F P/E of 23x (4-year average) valuation as fair given upside from stronger recovery in aerospace and equipment division.

To acquire Aviatron, an aircraft structure parts manufacturer

● SAM Engineering and Equipment (SAMEE) yesterday (25 Sep 2023) announced it is acquiring a 100% stake in Aviatron (M) Sdn Bhd (Aviatron) for RM203m in cash from its major shareholder Singapore Aerospace Manufacturing Pte Ltd (SAMPL) as well as settle the RM201m shareholder loan Aviatron took from SAMPL.

● Aviatron manufactures aircraft structure parts as well as precision and engineering components; it is a key supplier of nacelle beams used in Boeing and Airbus aircraft.

● In conjunction with the acquisition, SAMEE plans to undertake a 1-for-4 rights issue for a total of 135.4m shares to be issued at an indicative issue price of RM4.12 per share.

● The proceeds of c.RM557.8m will be used to fund the acquisition and repay SAMEE’s existing debt of c.RM149.9m.

● SAMPL will underwrite the entire rights issue on a full subscription basis. Assuming SAMPL ends up underwriting 100% of the rights issue, its shareholding in SAMEE will increase from 62.5% to 70%, and will not trigger a mandatory take-over offer.

● The related party transactions (RPT) require the approval of SAMEE’s minority shareholders. Management expects the acquisition to be completed by 1QCY24.

● The acquisition values Aviatron at a P/E of 81x or EV/EBITDA of 9.9x against SAMEE’s FY3/23 P/E of 29x or FY3/23 EV/EBITDA of 15x.

Acquisition, as it is, will be earnings dilutive

● All else being equal, based on Aviatron’s FY3/23 audited financial statements, the transaction would be earnings dilutive for SAMEE.

● In our view, the synergy would be limited to administrative synergies as some of SAMEE’s costs and revenues are tied to Aviatron and would largely be netted off.

● Based on SAMEE’s 25 Sep closing share price of RM4.70, post-acquisition, SAMEE’s EV/EBITDA would fall from 15.1x to 14.6x but its P/E will rise from 29x to 34x.

● SAMEE’s net debt to EBITDA ratio would ease from 2.3x to 1.3x. 

Maintain Hold and unchanged TP of RM4.95

● We keep our Hold call and GGM-based TP of RM4.95.

● We see upside risk to the acquisition if Aviatron’s net profit recovers to its pre-Covid levels of RM24.4m in FY3/19. We expect to see a recovery in SAMEE’s aerospace earnings to pre-Covid levels by FY26F, as covered in our previous report “Going back to equipment division for takeoff” dated 16 Aug 2023.

● Downside risks of this acquisition: i) investors taking this RPT negatively, potentially placing a permanent P/E multiple discount on SAMEE’s share price, and ii) failure to show meaningful synergies or additional costs incurred for the acquisition

● We reiterate our view that SAMEE’s future growth will be led by its equipment division and its exposure to the front-end semiconductor industry. Upside risks to our Hold call: faster-than-expected recovery in Airbus and Boeing’s aircraft production rates which will accelerate the recovery of its aerospace earnings, and lower-than-expected operating costs. Downside risks: slower recovery in Airbus and Boeing aircraft deliveries, higherthan-expected operating costs.

Source: CGS-CIMB Research - 26 Sep 2023