• Stay BUY and MYR4.34 TP, 37% upside and c.2% FY25F (Mar) yield. Pestech International (PEST MK, NR) announced that the subscription agreement pertaining to a 44.8% proposed acquisition in the group by IJM Corp for MYR124m – which made headlines in Jul 2023 – has been mutually terminated. This has led to the abortion of said acquisition on grounds of non- fulfilment of conditions precedent outlined in the agreement.

• Most importantly, the MYR176m contract awarded to the 60:40 IJM- Pestech JV for the automated people mover project at the Kuala Lumpur International Airport or KLIA remains intact despite the termination of the subscription agreement. Even if said contract was cancelled, IJM’s outstanding construction orderbook would only be reduced to c.MYR7.2bn from MYR7.3bn – as per our estimates.

• Back in Jul 2023, we highlighted that IJM’s initial interest in Pestech was for the long run – banking on adjacent verticals such as rail electrification and transmission lines. This was in addition to overseas exposure, eg Cambodia. However, we note that Pestech’s balance sheet continues to remain stretched with a net gearing ratio of 2.6x as at end March – the group has also recorded a losing streak of eight consecutive quarters.

• Life goes on. We believe IJM’s abortion of the Pestech acquisition may enable it to focus on core strengths – eg infrastructure such as roads and rail – together with budding niches such as its expanding exposure in industrial buildings (mainly warehouses and semiconductor manufacturing facilities). This makes up 20-30% of the group’s outstanding orderbook.

• What to look out for? Locally, IJM has teamed up with Permodalan Negeri Selangor and Lim Seong Hai Capital (LSH MK, NR) to study viable connectivity routes focused in the Southern Selangor Integrated Regional Development area. This may give rise to new highway jobs.

• We make no changes to our estimates, as we previously did not impute the financial impact of the proposed acquisition of IJM in Pestech. Therefore, our SOP-derived TP of MYR4.34 (which bakes in a 2% ESG premium) remains unchanged. Valuation wise, the group’s 21x FY25F P/E may see further upsides attributable to its stronger exposure in non-data centre industrial jobs vs peers – putting IJM in the sweet spot to benefit from recent foreign direct investment or FDI influx into the country, which could necessitate more factories and warehouses. Malaysia has attracted MYR76bn worth of potential foreign investments as of March.

• Key downside risks include failure to secure contracts in a timely manner.

Source: RHB Research - 19 Aug 2024