ROHAS TECNIC BHD

By Hong Leong Investment Bank Research Buy (maintained)

Target price: RM1.67

HONG Leong Investment Bank (HLIB) Research was positive on Rohas’ move to acquire a 75% stake in HG Power Transmission Sdn Bhd (HGPT), an engineering, procurement, construction and commissioning (EPCC) firm.

Rohas acquired the equity interest at a cost of RM91.66mil, via issuance of 72.8 million Rohas shares at 95 sen apiece and RM22.5mil in cash through internally generated funds.

Note that the acquisition has been approved by Rohas’ shareholders last week.

“It is a positive surprise because the acquisition cost represents a price-earnings ratio (PE) of 11.8 times which is substantially lower than the industry average of 17.4 times. Moreover, the ex-cash PE of the deal is lower at 7.1 times if we take into account RM50mil of net cash on HGPT’s balance sheet as at end2016.

“As more than 75% of the purchase consideration is satisfied through the issuance of new shares, such an arrangement further enhances the attractiveness of the deal given that the implied PE of issue price of new shares at 15 times is significantly higher than the ex-cash PE of HGPT,” said HLIB Research in a note.

The research house added that the acquisition of HGPT is expected to open up more EPCC contract opportunities for Rohas in new markets.

Post-acquisition, HGPT’s order book is expected to grow from the current level of approximately RM300mil, leveraging on the financial strength of being part of a listed company amid significant growth of its target market.

“We reduce our earnings per share (EPS) estimate for financial year (FY) 2017 by 13.6% but raise FY18-FY19 EPS forecast by 2.6%-4% after factoring in earnings contribution from HGPT and the enlarged share base resulting from the acquisition.

“We like Rohas for its exposure to Asean which is one of the fastest growing economic regions in the world. Infrastructure investment needs are expected to be robust in the foreseeable future and this will generate steady demand for the products of the company,” said the research house.

HLIB Research has reiterated its “buy” call on Rohas but revised its target price upwards to RM1.67 after factoring in possible contribution from HGPT.