We recently met up with Rohas’ management. Its EPCC orderbook currently stands at c.RM450m (3.5x cover ratio). This is expected to provide a strong boost to Rohas’ earnings growth for the next 2 years. Rohas is exploring provision on HGPT’s liquidated damages incurred by some completed projects before it acquired the latter. Management did not disclose the potential amount but we estimate it to be around RM10m based on the discount they got from the original purchase consideration of HGPT. Rohas 49%-owned 7MW Lawe Sikap mini-hydropower plant in Indonesia is expected to start contributing in 2Q19 and we estimate that the net contribution to Rohas is c.RM4m annually. Maintain forecast and BUY rating with lower TP of RM1.38 (13x FY19 earnings) due to overall construction sector de-rating.

Below are the key takeaways from our recent meeting with Rohas’ management.

EPCC orderbook. Rohas’ EPCC orderbook currently stands at c.RM450m, representing c.3.5x cover ratio of their FY17 EPCC revenue. This is expected to provide a strong boost to earnings growth for the next 2 years. Besides, the company is targeting for orderbook replenishment of RM500m this year. We understand that bulk of the new jobs will come from Bangladesh as newly acquired HG Power Transmission (HGPT) is one of the top 3 EPCC companies in Bangladesh’s power transmission sector. HGPT is expected to benefit from further investment in power transmission and distribution infrastructure which is estimated at USD$20bn in order for the country to generate 60,000MW of electricity by 2041.

Legacy issues from HGPT. Rohas is exploring provision on HGPT’s liquidated damages incurred by multiple completed projects before it acquired the latter. Management did not disclose the potential amount but our “guesstimate” is around RM10m based on the discount they got from the original purchase consideration of HGPT. To recap, the original purchase price for HGPT was RM102m and Rohas negotiated for a 10% discount after estimated potential liquidated damages incurred from HGPT’s legacy projects. We deem that the impairment is one-off as it is related to costs incurred before the acquisition and hence no impact to our core earnings forecast. Moreover, Rohas has been compensated by getting a discount to their original consideration.

Mini-hydro to contribute next year. Rohas 49%-owned 7MW Lawe Sikap mini hydropower plant in Indonesia is expected to start contributing in 2Q19 and we estimate that the net contribution to Rohas is c.RM4m annually.

Acquisition in Vietnam. Acquisition of water treatment plants in Vietnam is expected to be completed in 4Q18. Purchase price of RM40.6m translates to 10x P/E multiple based on our estimated annual profit of RM4m.

Forecast. Maintain earnings forecast as the potential impairment is one-off and non core.

Maintain BUY, TP: RM1.38. Maintain BUY with lower TP of RM1.38 (from RM1.69) as we adjust downwards PE multiple to 13x (from 16x) due to overall construction sector de-rating. Nonetheless we opine that Rohas deserve a premium compared with its small cap civil construction peers (7-9x) due to its niche exposure to power, water and telecommunication. We continue to 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.

Source: Hong Leong Investment Bank Research - 2 Nov 2018