KEY INVESTMENT HIGHLIGHTS

• Increase stake in Boilermech from 44.1% to 48.1%

• Minimal earnings impact

• Net gearing expected to increase to 0.54 if Boilermech is fully privatised

• Neutral on the acquisition

• Maintain NEUTRAL with an unchanged TP of RM5.89

Increase stake in Boilermech from 44.1% to 48.1%. QL Resources (QL) announced that it will be buying an additional 4.0% stake or 20.64 million shares in its associate company Boilermech from the latter’s managing director, Leong Yew Cheong, for RM0.95 apiece. This comes up to RM19.6m. Following the purchase, the company has triggered a conditional mandatory take-over offer, which will be extended to Boilermech’s other shareholders. QL intends to maintain the listing status of Boilermech.

Minimal earnings impact. The additional stake is expected to add another c.0.34% to QL Resource’s bottomline. In the event Boilermech becomes a subsidiary and QL gets to consolidate the entire earnings of Boilermech, net profit is expected to be boosted by another c.5.0%.

Net gearing expected to increase to 0.54x if Boilermech is fully privatized. We estimate that QL will have to fork out RM274m to acquire the 56% it had not owned if it were to fully privatise the associate company. However, we think that it is a less likely scenario as QL has stated its intention to keep Boilermech’s listing status. As such, we expect minimal impact to its balance sheet with an estimated net gearing of 0.42x as the 4.0% stake worth RM19.6m can be easily funded via its cashpile, which stood at RM446.5m as at end-September.

Neutral on the acquisition. QL’s acquisition of the stake is to further increase its exposure to the clean energy and environmental business via Boilermech. This is to enhance its environmental, social and governance (ESG) profile. We note that the offer price of 95 sen values Boilermech at an estimated 21.0x PER, which is higher than other Bursa-listed palm oil related equipment manufacturers such as Muar Ban Lee Group Bhd and CB Industrial Product Holding Bhd.

Maintain NEUTRAL with an unchanged TP of RM5.89. We make no changes to our earnings estimates pending conclusion of the deal. Our DCF-derived TP is based on an unchanged terminal growth rate of 6.0% and WACC assumption of 7.0%. We expect QL to deliver resilient earnings but note that valuation of the stock is rich. All in all, we maintain our NEUTRAL recommendation on the stock.

Source: MIDF Research - 4 Dec 2020