SWIFT has proposed to acquire a 100% stake in Watt Wah Petroleum PLC for SGD10.1m (RM32.8m) comprising SGD1.6m in cash (c.RM5.2m) and repayment of shareholder’s loan of SGD8.5m (c.RM27.6m). We are mildly positive on the acquisition which opens a new market in Singapore to SWIFT. We keep our earnings forecasts pending the completion of the transaction. Maintain OP with a TP of RM1.01.

Expanding to Singapore market. SWIFT has proposed to acquire the entire equity interest in Watt Wah Petroleum PLC for SGD10.1m (RM32.8m) comprising SGD1.6m (c.RM5.2m) in cash; and (ii) repayment of shareholder’s loan of SGD8.5m (c.RM27.6m) within two weeks of the proposal completion through loan refinancing. SWIFT has entered a binding offer (BO) with DLT Enterprise Pte Ltd (DLT) for the proposed acquisition. Watt Wah is principally involved in chartering, forwarding and transporting petroleum products with more than 20 years of experience in oil and gas logistic services, servicing all the oil majors as well as commercial customers. Watt Wah is a part of the Uneyo Group (Japan). The BO shall be effective for a period of two months from the date of the execution.

Valuations not excessive. Based on Watt Wah’s indicative net profit of SGD0.4m, the acquisition PER works out to be 25x which we believe is not excessive given its ready client base of oil majors including Shell and Caltex. We are mindful of Watt Wah potentially having a negative net asset value, based on the disclosure that its net asset value is SGD1.5m, excluding shareholders loan of SGD8.5m.

Impact on earnings and gearing. The acquisition will have minimal impact on SWIFT’s earnings as additional earnings from Watt Wah will be offset by the borrowing cost to fund the acquisition. Post the acquisition, SWIFT’s net gearing will rise from 0.83x to 0.88x which is still manageable.

Rationale of the acquisition. SWIFT highlighted that the proposed acquisition is a strategic move to expand their presence in Singapore. This acquisition is in-line with its strict criteria of assessing potential M&As with Watt Wah seen as a perfect fit for the group complementing its inland distribution, cross border, and freight forwarding segments.

Maintain OUTPERFORM with a TP of RM1.01 based on FY23E PER of 14x which is in-line with the local logistics average peers PER. We like the stock for its: (i) position as the leader in haulage business commanding close to 10% of Malaysian market share, and (ii) above peers’ pre-tax profit margin of 10% compared to industry average at 4% with its integrated offerings and cost-service advantage.

Risks to our call include: (i) sustained high fuel cost, (ii) global recession hurting the demand for transportation service; and (iii) delays in its primary warehousing expansion plan.

Source: Kenanga Research - 11 Aug 2022