SLVEST is acquiring a 30% stake in mechanical and electrical (M&E) engineering solutions Kee Ming Electrical Sdn Bhd (KMESB) for RM15.3m cash, at an attractive FY25F/FY26F/FY27F PERs of 8.5x/7.3x/7.3x (vs 16x accorded to M&E listed peer) based on a net profit guarantee of RM6m/RM7m/RM7m. This acquisition allows SLVEST's M&E EPCC arm, which currently focuses solely on solar power plants, to expand into the industrial sector and other areas like data centres. We raise our FY25-26F earnings by 3% each, lift our TP by 2% to RM1.99 (from RM1.95) while maintaining our OUTPERFORM call.

SLVEST is acquiring a 30% equity stake in KMESB from two non-related individuals, who hold 90% and 10% of KMESB, for RM15.3m cash. KMESB is a key player in the M&E EPCC sector, focusing on commercial, industrial, and solar power plants. The acquisition includes a net profit guarantee of RM6m/RM7m/RM7m for FY24/FY25/FY26 and is expected to be finalised by 1QCY25.

The deal values the asset at 8.5x, 7.3x and 7.3x FY25F/FY26F/FY27F PERs based on the profit guarantee, which are at a discount to the forward PER of the M&E sector of 16x.

The acquisition will raise SLVEST's net debt and gearing of RM91.4m and 0.3x as at end-2QFY25 to RM106.7m and 0.4x, respectively, which are still highly manageable.

We are positive on this deal as KMESB's limited solar presence and distinct client base create a strategic opportunity for both companies to leverage their complementary strengths, expand market reach, and unlock growth. The integration promises cost and operational synergies, especially in SLVEST's solar EPCC projects. With a solid RM200m order book, KMESB offers strong revenue visibility for the next two years.

Forecasts. We raise our FY25-26F earnings by 3% each to reflect the earnings enhancement from the acquisition.

Valuations. We also lift our TP by 2% to RM1.99 (from RM1.95) based on SoP valuation, ascribing 30x FY26F PER for its EPCC segment (in-line with the average historical 1-year forward PER of the solar EPCC sector), 16x FY26F PER for its newly acquired Kee Ming Electrical Sdn Bhd (in-line with the M&E players), 10x FY26F PER for its newly acquired SIW Manufacturing Sdn Bhd, and DCF at a discount rate of 5.5% to 5.6% for its LSS4, CGPP, and Powervest assets (see Exhibit 1). Note that our TP reflects a 5% premium given a 4-star ESG as appraised by us (see Page 4).

Investment case. We like SLVEST for: (i) the bright outlook of the RE market in Malaysia, underpinned by the government's strong commitment towards RE, the export potential of RE and improved commercial viability of solar power projects on falling solar panel prices, (ii) its dominant market position with a market share of over 30% in the solar EPCC space, and (iii) its strong earnings visibility backed by a sizeable outstanding order and tender books, and recurring income from a growing portfolio of solar assets. Maintain OUTPERFORM.

Risks to our call include: (i) the government dials back on RE policy, (ii) influx of new players in the solar EPCC space, intensifying competition, and (iii) escalation in project costs.

Source: Kenanga Research - 28 Jan 2025