Highlights

• Subsequent to the Heads of Agreement dated 4 April 2017, Rohas Tecnic Berhad (Rohas) has formally entered into an agreement with PT Safe Tower Systems Sdn Bhd (PTSTS) and Kemuncak Agresif (M) Sdn Bhd to acquire 75% equity interest in HG Power Transmission Sdn Bhd (HGPT) for a purchase consideration of c.RM91.7m.
• The purchase consideration will be satisfied via issuance of 72.8m Rohas shares at an issue price of RM0.95 and RM22.5m in cash through internally generated funds.
• HGPT is principally involved in engineering, procurement, construction and commissioning (EPCC) activities and provision of turnkey solutions for high voltage transmission lines and substations in Malaysia and overseas.
• The acquisition will enable Rohas to gain access to the entire value chain for the power transmission industry and increase its negotiation strength when bidding for and securing new projects.
• The deal is subject to shareholders approval and expected to complete in 4Q17.

Comments

• We are positive on the acquisition as the purchase consideration has been reduced by c.10% (from c. RM102m). Besides, the purchase consideration of 12x price-earnings ratio (PER) is significantly lower than industry average (17.8x) and issue price implied PE (15x). As such, estimated FY18 earnings per share for Rohas is expected to increase by c.3% (assuming stable HGPT earnings which we consider conservative) before factoring in any cost savings and synergies post acquisition.
• The acquisition also opens up more EPCC contract opportunities for Rohas in new markets such as Bangladesh, Papua New Guinea and Indonesia. At the same time, HGPT would also benefit from Rohas EPCC exposures in Vietnam and Laos. Note that HGPT’s orderbook currently exceeds RM400m and this will more than double Rohas current EPCC orderbook of c.RM300m post acquisition, hence providing strong earnings visibility for the company.
• Besides, 75% of the purchase consideration will be satisfied by issuance of new shares which would avoid any significant impact on the cash flow and gearing of Rohas (estimated net gearing only at c.6% post-acquisition).
• Moreover, Navis Capital (Navis) will hold 15.4% stake in the enlarged entity via exchanging PTSTS stake in HGPT for Rohas shares. We are encouraged by this move as we see Navis as a long-term capital and management partner.

Risks

• Failure to clinch future EPCC projects

Forecasts

• Unchanged pending completion of deal.

Rating

BUY ↔ , TP: RM1.39 ↔

• We like Rohas for its exposure to ASEAN which is one of the fastest growing economic regions in the world. Infrastructure investment needs are expected to be robust in the foreseeable future and this will generate steady demand for the products of the company.

Valuation

• Maintain BUY rating with unchanged TP of RM1.39 based on 16x P/E multiple pegged to FY18 earnings.

Source: Hong Leong Investment Bank Research - 25 Jul 2017