Highlights

• Acquisition approved… Acquisition of 75% equity interest in HG Power Transmission Sdn Bhd (HGPT) has been approved in the EGM held on 16 Oct. To recap, the purchase consideration of c.RM91.7m is satisfied via issuance of 72.8m Rohas shares at an issue price of RM0.95 and RM22.5m in cash through internally generated funds.
• Positive surprise… The purchase consideration represents a price-earnings ratio (PER) of 11.8x which is substantially lower than industry average (17.4x). Moreover, the ex-cash PER of the deal is lower at c.7.1x if we take into account c.RM50m of net cash on HGPT balance sheet as at end- 2016. As more than 75% of the purchase consideration is satisfied through issuance of new shares, such arrangement further enhances the attractiveness of the deal given that the implied PER of issue price of new shares (15x) is significantly higher than the ex-cash PER of HGPT.
• Order book level to rise… Post-acquisition, we expect HGPT to grow its order book from current level of c.RM300m leveraging on the financial strength of being part of public listed company amid significant growth of its target market.
• Cost overrun issue… Regarding the cost overrun issue in a project which dragged down the earnings of HGPT in first half of FY17, we understand that the project had been completed before completion of the acquisition and all related costs had been expensed off. Hence, there will be no negative impact on Rohas. On a positive note, Rohas may benefit from one-off income write-back if claim of variation orders related to the project is approved.

Risks

• Failure to clinch future EPCC projects

Forecasts

• We reduce FY17 EPS estimate by 13.6% but raise FY18-19 EPS forecast by 2.6-4.0% respectively after factoring in earnings contribution from HGPT and enlarged share base resulting from the acquisition.

Rating

Maintain BUY, TP :RM1.67↑

• 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. Moreover, the acquisition of HGPT is expected to open up more EPCC contract opportunities for Rohas in new markets and we expect stable EPCC contract flows for the company due to the essential nature of infrastructure industry in emerging markets.

Valuation

• Maintain BUY recommendation with higher TP of RM1.67 after we impute contribution from HGPT. Our TP is based on unchanged 16x P/E multiple pegged to FY18 earnings.

Source: Hong Leong Investment Bank Research - 30 Oct 2017