HSS Engineers to buy water specialist for RM270mil

Company to subsequently bid for more water projects

KUALA LUMPUR: Engineering and project management consultant HSS Engineers Bhd is planning to buy the entire equity stake in SMHB Engineering Sdn Bhd for RM270mil in a move that could see HSS bid for more water infrastructure projects locally and abroad.

HSS co-founder and executive director Tan Sri Kuna Sittampalam said the rationale to acquire the engineering consultancy that specialised in water infrastructure works made sense as it would create a bigger entity in a rather competitive landscape.

“As we head towards developed nation status, competition is stiff.

“With the proposed acquisition, both parties have the strategic fit and the enlarged entity will boast of extensive complimentary capa- bilities across the transportation and water sectors. We have added skills to bid for projects in Asean, the Middle East and India,” he said after a heads of agreement signing with SMHB yesterday.

Apart from building stronger skill sets, Kuna said the enlarged entity will also own a substantial order book.

Post-merger, the combined order book would increase to almost RM740mil, with HSS Engineers’ portion at RM400mil, while SMHB’s outstanding jobs amounted to RM338mil.

The combined order book has a life span of three to five years, depending on the complexity and duration of works, according to Kuna, a substantial shareholder with a 31.34% stake in HSS Engineers.

In terms of tender book size, Kuna revealed that HSS Engineers’ was RM250mil, while SMHB’s stood at RM215mil.

The purchase consideration of RM270mil entailed RM162mil cash and the balance RM108mil via the issuance of new HSS shares to SMHB.

According to HSS Engineers’ filings with Bursa Malaysia yesterday, the group intends to pay 50% of the acquisition price via bank borrowings and the balance via placement and rights issue.

“We expect to sign the sale and purchase agreement in a month and to complete the entire corporate exercise in the first quarter of 2018, he said.

However, prior to the proposed acquisition, SMHB is required to carry out a restructuring within the group.

For the financial year ended April 30, 2016 (FY16), SMHB posted profit after tax (PAT) of about RM25mil on revenue of RM93mil, while HSS Engineers’ PAT for FY16 was RM14mil with a revenue of RM139mil.

Meanwhile, the purchase consideration represents an enterprise value/earnings before interest, tax, depreciation and amortisation multiple of 7.7 times and price-earnings multiple of 10.8 times, according to HSS Engineers’ notes.

The corporate exercise is subject to approvals from the relevant authorities and HSS Engineers’ shareholders at the upcoming EGM.

Kuna had previously said that the company was looking at tilting towards a more recurring income business model since its revenue stream was almost completely contract-based.

Trading of the counter was suspended temporarily due to the announcement of the corporate exercise yesterday.