Taken private in 2008, ROHAS made a comeback to the local bourse via a reverse takeover of Tecnic Group Bhd in March this year. While the Group’s core business of fabricating power and telecommunications towers will provide the Group with a baseline revenue stream, forward growth will be driven by EPCC works in Laos in addition to the proposed acquisition of HGPT. Combined, ROHAS’s enlarged order-book would balloon to RM850m and more importantly, the HGPT acquisition opens up new avenues to ride on the infrastructure boom in untapped Asian markets. We recommend a Trading Buy with a TP of RM1.41 based on FY18E FD EPS.

Growing order-book of RM850m. As at 1Q17, ROHAS has an outstanding order-book of RM450m, which will last until FY19. These comprise of RM150m in fabrication of steel towers for the power and telecommunication industries and RM300m in its EPCC project in Laos. Additionally, the Group announced that it is acquiring a 75% ownership stake in HG Power Transmission Sdn Bhd (HGPT) for RM91.7m, which would provide an instant boost of RM400m to the Group’s existing order book consisting of EPCC contracts.

Beneficiary of the country’s power and telco infrastructure needs. Given the Group’s c.85% domestic market share in power transmission towers, ROHAS is well positioned to benefit from the country’s growing power generation and transmission development plans, including the development of new and existing power plants under the 11th MP as well as new 500kW transmission lines and substations. To a lesser extent, the roll-out of 4G/LTE networks in the country should also complement ROHAS’s telco tower business. Although its RM150m order-book for the tower fabrication business appears unexciting at first glance, the contract has short delivery schedules and tends to be more stable and recurring in nature - thus providing the Group with a baseline revenue stream.

Deeper foray into high growth regional markets. Going forward, growth will be driven by ROHAS’s foray into the regional markets via EPCC works. Already, the Group has secured RM300m EPCC contract in Laos, which will commence in 2H17 with a timeline of 2 years. At the same time, ROHAS’s proposed acquisition of HGPT will provide the Group with a foothold into high growth markets such as Indonesia, Bangladesh, Sri Lanka and Philippines given HGPT’s long-standing track records. Beyond the next two financial years, we also believe that ROHAS’ 49% investment in the Lawe Sikap 7MW mini-hydro will provide yet another stream of recurring income whilst also serving as a stepping stone towards more water-related concessions in the region.

Projecting Core Net Profit growth of 9.6%/53.8% for FY17/FY18E, backed by: (i) steady 5.0%/7.1% revenue growth from the Group’s power transmission and telco tower fabrication business, (ii) execution of the Laos EPCC project from 2H17, and (iii) imputing the contribution from the HGPT acquisition from FY18, which would more than make up for the thinner EBIT margins of 16.8%/11.3% (from 19.2% in FY16) resulting from the lower margin EPCC works.

Trading Buy with TP of RM1.41. We value ROHAS based on 15x FY18E PER, which is at a slight discount to our targeted 16x PER valuation on PESTECH, while above small cap contractors (13-14x). We believe the valuation is fair, given ROHAS’ positioning in a niche market, requiring specialised skill-sets where there are few competitors. Including an expected dividend of 3.8 sen based on a 40% pay-out ratio (DY: 3.2%), this implies a ~21% total return. Risks include: (i) delays in projects, (ii) lower-than-expected order-book replenishment, and (iii) weaker-than-expected margins.

Source: Kenanga Research - 7 Aug 2017