The group is acquiring additional 20.6m shares (4% stake) in Boilermech Group for a cash consideration of RM19.6m (RM0.95/share), which would increase its total equity stake to 48.15% post-acquisition. This would trigger a conditional mandatory take-over which is subject to 50% acceptance, with a targeted completion by 1HCY21. Overall, we are neutral over the acquisition due to the minimal financial impact. Maintain MP with unchanged TP of RM6.60, pending further updates on this matter.

Acquiring additional 4% stake in Boilermech for RM19.6m. Yesterday, the group has entered into an unconditional share agreement to acquire 20.6m shares (represents 4% stake) in Boilermech Holdings Berhad for a cash consideration of RM19.6m (RM0.95/ share). Along with its existing 44.15% stake in Boilermech, QL’s total equity stake will rise to 48.15% upon completion of the acquisition. As the SSA is not subject to any condition precedent, the completion will take place immediately as of the next market day (i.e. today).

Triggering a conditional mandatory take-over. The foresaid acquisition will trigger a conditional MTO, subject to the 50% acceptance and the approvals of any other relevant parties if required, with a targeted completion by 1HCY21. Should the conditions are fulfilled, QL intends to maintain the listing status of Boilermech and does not intend to acquire any remaining Offer Shares from the Holders who have not accepted the Offer. The offer price of RM0.95/share is at a 3.4% premium to Boilermech’s 5-day VWAP up to and including 2 Dec 2020. This implies c.21x PER to Boilermech’s FY20 net profit of RM23.3, which is at a premium over the 5-year historical average PER of 16x.

Increased exposure in the ESG sector. The rationale of the acquisition is in-line with the group’s strategy to lift its exposure within the ESG sector, given that Boilermech is involved in the biomass and solar energy sectors. That said, we are neutral over this acquisition as our preliminary estimates suggest that the additional 4% stake in Boilermech would pose negligible impact to earnings. Furthermore, assuming the proposed acquisition of RM19.6m is fully debt funded given that QL has yet to disclose its planned proportion of borrowings against internal funds for this acquisition, the group would still remain in a comfortable net gearing of 0.25x (versus pre-acquisition’s 0.24x).

Post announcement, we made no changes to our earnings forecasts, pending further updates.

Maintain MARKET PERFORM with unchanged TP of RM6.60, based on an unchanged 54.0x FY22E PER, closely in-line with the stock’s +1.0SD over its 3-year mean PER). While valuation appears rich at this level, we believe it is justified, premised on its resiliency and rosy earnings growth expectations of c.13-9% for FY21-22. Nonetheless, the current valuations may have priced in the foresaid merits, limiting its near-term upside potential. Risks to our call include better/worse- than-expected MPM sales.

Source: Kenanga Research - 4 Dec 2020