Highlights

• Boustead proposed to subscribe to a 50% equity stake and 550k redeemable convertible preference shares (RCPS) in Irat Group for RM127.8m and RM55.5m respectively.

• Irat Group owns a 70% stake in Irat Hotels and Resorts Sdn Bhd, which in turn owns Chulan Tower Office Block and The Royale Chulan Hotel. Irat Group recently entered into 2 conditional share sale and purchase agreements to acquire the entire stakes in 2 companies, namely A.T.E.S. Sdn Bhd (ATES) and Beta Tegap Sdn Bhd, which are principally engaged to undertake the operation of automated traffic enforcement system (AES) in Malaysia.

• The proposed subscription is expected to be completed by 2Q 2015.

Impact

• Impact on earnings: Slight negative to Boustead’s earnings, as positive contribution from the additional hotel and office block will likely be negated by the AES operations (which are still loss making).

• Impact on balance sheet: Negligible, the acquisition will bring up Boustead’s net debt and net gearing from RM5.9bn and 1x to RM6bn and 1.02x.

• While the acquisition of Irat (in particularly, the AES operations) is aimed at expanding the group’s revenue source, we are at best neutral on the latest acquisition, given the long gestation period for the full implementation of the AES project.

Risks

• Lower-than-expected revenue contributions from different divisions and/or margin falling short of expectations as well as relatively high gearing.

Forecasts

• Maintained.

Rating

BUY

Positives

• (1) Still undervalued given the deep embeddedvalues of the group, (2) Relatively high and quarterly net dividend yield; and (3) Market has yet to fully appreciate the hidden value.

Negatives

• (1) Relatively high gearing and complicatedgroup; (2) Quarterly fluctuation in earnings; and (3) Weak near-term earnings outlook.

Valuation

• Maintain SOP-derived TP of RM5.54 (see Figure 4) as well as our BUY recommendation on the stock.

Source: Hong Leong Investment Bank Research - 9 Mar 2015