• Keep NEUTRAL and MYR1.59 TP, 8% upside. IJM Corp announced that it has entered into a subscription agreement for c.44.8% of Pestech International’s (Pestech; PEST MK, NR) enlarged share capital for MYR124m. Pestech is principally engaged in the provision of project management, engineering, digitalisation, manufacturing, installation, testing, and commissioning of electrical power infrastructure for power grid and rail networks. While the subscription has triggered a mandatory takeover offer, IJM will be applying for an exemption.

• Further details. The subscription price of MYR0.155/share represents a discount of c.48% to the last traded price and volume-weighted average market price of Pestech shares up to and including 21 Jul 2023. We believe the discount is fair, and reflects Pestech’s losses after tax recorded over the past four consecutive quarters amid lower turnover (9MFY23 (Jun): MYR329.3m vs 9MFY22: MYR583m) and higher operating costs.

• Proceeds from IJM’s MYR124m subscription will see 68% utilised for immediate day-to-day working capital requirements for Pestech’s projects, such as the upgrade of the Kuala Lumpur International Airport’s Aerotrain and the job from Electricite du Cambodge in Cambodia. Pestech will use 24% of the proceeds to repay borrowings and reduce its net gearing ratio of 1.30x (as of end FY22) to 1.16x based on the enlarged share capital post subscription – ensuring that its debt levels remain manageable. IJM’s subscription may help Pestech achieve breakeven at a faster pace – likely by FY26/FY27 – with a narrowing trend in annual losses, based on our preliminary estimates.

• Synergies. As of 31 Mar, Pestech’s orderbook was at MYR1.6bn, translating to a revenue cover ratio of c.2x (below the construction peer average of 3-4x). Notwithstanding this, IJM’s stake in Pestech may enable both parties to tender for infrastructure jobs beyond their normal scope (civil construction for IJM and rail and electrification systems for Pestech), particularly civil and system-related packages for the Klang Valley Double Track 2, the Penang Light Rail Transit, and possibly the Kuala Lumpur- Singapore High-Speed Rail. IJM could also expand its geographic reach, as Pestech operates in markets such as Cambodia, the Philippines, Thailand, and Papua New Guinea. From an ESG perspective, Pestech is involved in power plant electrification and automation services for renewable energy plants.

• Earnings and valuation. No changes to our estimates, pending further clarification during today’s briefing. We maintain our SOP-derived TP of MYR1.59, which includes a 0% ESG premium/discount. A new win from India would be an impetus for the stock, given the competitive landscape in the country.

• Key risk: Slower/faster-than expected job replenishment.

Source: RHB Research - 25 Jul 2023