News

Boustead to acquire 80% in PFCE (PFC Engineering Sdn Bhd) for RM20m cash with profit before tax guarantee of RM20m for FY15 and FY16 vs. net loss of RM114.2m in FY13.

PFCE is an integrated engineering and maintenance services provider for the oil and gas industry, principally involved in the provision of project engineering services specialising in engineering, procurement, construction and commissioning services, facilities maintenance services and trading of oil and gas industry-related mechanical parts, equipment, tools and materials, for both onshore and offshore facilities

Boustead will procure RM35m loans/advances for PFCE funding requirements.

Financial impact

Net debt will increase by 3% (manageable) due to consolidation of PFCE debt.

Assuming financing cost of 6% (for both the acquisition cost and loans/advances), the profit guarantee will boost earnings by circa 3%.

Pros / Cons

Neutral given that it is a relatively small acquisition that comes with profit guarantee which would value the acquisition at slightly over 1x P/E.

It will also further enhance the group’s heavy industry division as well as its expansion into O&G related businesses, especially after the recent acquisition of land in Port Klang for O&G fabrication yard.

However, given PFCE heavy losses in FY13, earnings sustainability is suspect post the profit guarantee as the company need to record sharp turnaround within four years.

Risks

Lower than expected revenue contributions from different divisions and/or margins falling short of expectations as well as relatively high gearing and dilution from potential cash call.

Forecasts

Unchanged.

Rating

BUY

Positives –

• Still undervalued, relatively high and quarterly net dividend yield, earnings sustainability and market yet to fully appreciate the hidden values.

Negatives –

• Relatively high gearing and complicated group as well as quarterly fluctuation in earnings.

Valuation

Target price maintained at RM6.23 (10% holding company discount to estimated SOP of RM6.92).

Source: Hong Leong Investment Bank Research- 7 Aug 2014