QL have agreed to increase its stake in Boilermech Holdings Bhd by 4% (to 48.15% from 44.15% currently) for a cash consideration of RM19.6m (or RM0.95 per share). Upon completion of the acquisition, QL will make a conditional mandatory offer for all the remaining shares at the same price of RM0.95 per share. While the impact will be rather minimal from a financial standpoint, we are positive on this move from an ESG perspective (Boilermech has a footprint in clean energy). Maintain forecast and TP of RM5.88 pegged to an unchanged 50x earnings multiple of FY22 earnings.

NEWSBREAK

QL has agreed to increase its stake in Boilermech Holdings (not-rated) by 4% (to 48.15% from 44.15% currently) for a cash consideration of RM19.6m (or RM0.95 per share). Upon completion of the acquisition, QL will make a conditional mandatory offer for all the remaining shares at the same price of RM0.95 per share. The condition being QL ending up with more than 50% of Boilermech shares after the mandatory offer is made.

HLIB’S VIEW

Transaction details. QL’s purchase price of RM19.6m for a 4% stake (valuing the entire company at RM490.2m) implies a PE multiple of 20.3x based on FY19 earnings. We believe this is slightly on the high side as this multiple would be approximately +1SD above Boilmermech’s 5-year average of 16.2x. In the event that there is a full take up of the mandatory offer from remaining shareholders, QL would pay a total cash consideration of RM273.8m.

Rationale. Boilermech manufactures, repairs, and refurbishes boilers. The company primarily serves the palm oil milling industry. Earlier this year, Boilermech ventured into solar energy. QL shared that the rationale behind this acquisition is to increase its exposure to businesses within the ESG sector. While the impact will be rather minimal from a financial standpoint, we are positive on this move from an ESG perspective which is gaining importance amongst investors. Boilermech has a footprint in clean energy given their business operations involving boilers, which generate energy from biomass as well as their recent foray into solar energy. As such, this proposed acquisition fits well into QL’s already commendable ESG efforts.

Impact. Based on Boilermech’s FY20 earnings of RM24.1m, QL’s 4% increase in Boilermech ownership would result in core PAT rising by c.RM1m (<1% increase in FY21f earnings) while proforma net gearing would rise from 51.3% to 52.3%. In the event the conditional mandatory offer receives full take up, QL’s PAT would rise by c.RM13.4m (5% increase in FY21f earnings) and proforma net gearing from 51.3% to 65.3%.

Forecast. As the impact of the acquisition is minimal, we maintain our forecasts.

Maintain HOLD. We maintain our TP of RM5.88 pegged to an unchanged 50x earnings multiple of FY22 earnings. While we like QL for its diversified revenue streams, savvy management and growing Family Mart division, we reckon QL is fairly priced at current levels (56.6x forecasted FY21 earnings).

Source: Hong Leong Investment Bank Research - 10 Dec 2020