IJM’s proposed purchase of Pestech stake poses near-term risks

KUALA LUMPUR: IJM Corp Bhd’s proposed entry into Pestech Bhd as a strategic shareholder could pose some risks as Pestech as been posting operating losses for four consecutive quarters.

Hong Leong Investment Bank (HLIB) Research said that while the acquisition price of the stake is relatively cheap based on Pestech’s historical financial norms, IJM will have to be able to revive the company’s prospects.

“Near-term risks come from Pestech’s ongoing operational weakness and potential impairments,” said the research firm.

It added that there could be a hurdle to the transaction coming from the upcoming extraordinary general meeting (EGM) as the issue price is at a steep 42.6% discount to Pestech’s last close.

However, HLIB noted that there are synergies arising from the acquisition as Pestech’s track record in energy transmission projects coupled with IJM’s E&C experience could open doors to more power plant construction projects.

In the railway segment, the research firm said a collaboration could yield a more integrated offering to participate in the upcoming Mass Rapid Transit 3, Penang Light Rail Transit and Klang Valley Double Track 2 as well as opportunities in Thailand.

“IJM, through Pestech could also tap into the large addressable market of power grid upgrades projected at US$1 trillion (to 2040) in South

East Asia,” it said.

On Pestech’s financials, HLIB said the offer price of 15.5 sen or RM124mil for a 44.83% stake translates to a FY22 price-earnings multiple of 20.3x while comparisons with Pestech’s historical norm would yield PE multiples of 3-5x.

The research firm estimated that enlarged Pestech’s net gearing will drop from 2x to 1.8x (including perps) with the cash injection.

“It is worth noting that a majority of its RM1.3bn debt are ring -fenced (RM700-800mil),” said HLIB.

Meanwhile, HLIB said Pestech’s FY23 revenue could come in the RM500-600mil range while 4QFY23 is unlikely to see major impairments.

It added that Pestech’s contribution will only be reflected in IJM’s 3QFY24 results onwards following completion of the transaction in 4QCY23.

Going forward, HLIB estimates that given the current dispute on contract termination from the Gemas-Johor Bahru project, there could be impairments relating to RM17-20mil unclaimed work done and RM15-20mil retention sum.

It said the impact to IJM’s balance sheet position is negligible.

HLIB has a “buy” call on IJM with a target price of RM1.88.