HSS acquisition of SMHB will be earnings accretive, says Affin Hwang

KUALA LUMPUR: Affin Hwang Capital Research is positive on HSS Engineers Bhd's proposed acquisition of SMHB Engineering Sdn Bhd for RM270mil. 

The research firm is maintaining its Buy call on the counter with a target price of RM1.34.

HSS's engineering consultnacy services in the water sector will leverage SMHB's 50 years of expertise and strong record. Its order book will also increase 85% to RM738mil with a combined workforce of 1,000 employees, it said.

"We believe the RM270m purchase consideration is attractive at acquisition PER of 10.8x (based on SMHB’s FY16 net profit of RM25m). This compares to HSS’ FY17 PER of 24.2x (based on RM364m market cap as at 29 September 2017) and global peers’ average CY17 PER of 19.5x. 

"Acquisition EV/EBITDA of 7.7x is lower than HSS’ FY17E EV/EBITDA of 14x and peers’ average of 10.1x. Hence, the acquisition is earnings accretive. The purchase consideration of RM270m will be funded by bank borrowings (RM81m), private placement and rights issue (RM81m) and issuance of new HSS ordinary shares at RM1.14/share (RM108m) to the vendors of SMHB."


POst-acquisition, the research firm said HSS's FY16 revenue and net profit jumps 67% to RM232mil and 178% to RM39mil respectively. HSS's net profit margin will also increase owing to SMHB's more profitable business.

"In our base-case scenario assuming the rights issue and private placement issue price is RM1.14, we estimate HSS’ FY18E EPS will be enhanced by 18% post-acquisition.
"
Even when we apply a discount of 10-30% discount to our basecase issue price, EPS will be enhanced by 11-16%," it said.