HLIB Research said it was cautious about IJM’s proposed acquisition of a 44.8% stake in the enlarged share capital of Pestech, citing the latter’s ongoing operational weakness and potential impairments as near-term risks.
PETALING JAYA: Despite the synergistic benefits, some analysts are not overly excited about IJM Corp Bhd
’s entry into Pestech International Bhd as a strategic shareholder.
Hong Leong Investment Bank (HLIB) Research said it was cautious about IJM’s proposed acquisition of a 44.8% stake in the enlarged share capital of Pestech, citing the latter’s ongoing operational weakness and potential impairments as near-term risks.
“While the acquisition price is relatively cheap based on Pestech’s historical financial norms, this is conditional on nursing it back to health.
“Achieving this would represent RM20mil to RM40mil earnings per annum uplift to IJM,” the brokerage wrote in its report.
TA Research had a “neutral” view on the deal, noting that Pestech’s balance sheet health is a potential risk.
“Despite Pestech being backed by RM1.6bil of the outstanding order book (2.2 times 2022 revenue) as of end-March 2023, the company was sitting with a net debt of RM1.2bil (1.6 times net gearing),” the brokerage explained.
“Hence, we do not discount the possibility that Pestech may need to make a cash call again if liquidity constraints persist.
“Additionally, IJM will be subject to earnings volatility if the earnings performance of Pestech falls short of expectations,” the research house added.
Both HLIB Research and TA Research recommended “buy” on IJM, with unchanged target prices of RM1.88 and RM1.85, respectively.
IJM announced that it had entered into a conditional subscription arrangement to subscribe 800 million shares, or 44.8% of the enlarged share capital in Pestech for RM124mil, or 15.5 sen per share.
The proposed acquisition, expected to be completed by the fourth quarter of 2023, would be funded via a combination of internally generated funds and bank borrowings.
TA Research said the purchase price, valued at 0.4 times Pestech’s price-to-book, was “fair” and “reasonable”.
“We believe the proposed acquisition will serve as complementary to the IJM’s existing construction business.
“Given that Pestech has strong expertise in energy transmission, rail electrification and signalling, we see synergistic benefits as IJM can expand its capabilities to offer more comprehensive solutions, especially for railway-related projects,” it added.
HLIB Research saw potential hurdle for the deal at Pestech’s EGM.
“Though Pestech has been reporting losses in the past four quarters, the acquisition price does represent a steep 42.6% discount to closing price and 45.97% discount to the 12-month volume-weighted average price.
“Given that transaction is subject to Pestech’s shareholders’ approval, there is no telling if a simple majority will be obtained,” it explained.
It acknowledged there were key synergies from the deal for IJM in the form of integrated offerings for power plant and railway projects.
MIDF Research pointed out that IJM’s proposed entry into Pestech would enable the former to tap into Pestech’s expertise in energy transmission and rail electrification, thus strengthening IJM’s competitive advantage.
In addition, Pestech’s presence in South East Asia would ease IJM’s plans for geographical expansion in the region, the brokerage said.
MIDF Research maintained its “buy” call on IJM, with an unchanged target price of RM1.93.
It said it remained optimistic on IJM’s outlook for the financial year ending March 31, 2024, on expectations of stronger construction job flows.
