This article first appeared in The Edge Malaysia Weekly on July 31, 2023 - August 6, 2023

IJM Corp Bhd managing director and group CEO Lee Chun Fai is in high spirits and chatty in his first interview with The Edge since taking the helm at the construction giant in April. His excitement may stem from the group’s plan to acquire 44.83% of engineering outfit Pestech International Bhd.

If the deal goes through, IJM could make a killing, as the proposal entails a purchase price of 15.5 sen per share, a 47.46% discount to the market price when the deal was announced and less than 30% of Pestech’s net assets per share of 53 sen as at end-March. Then again, there are some who question if the acquisition is indeed a sweetheart deal for the group.

Here are excerpts from the interview.

The Edge: IJM’s acquisition of a stake in Pestech comes at a time when there have been issues at the company — the Malaysian Anti-Corruption Commission (MACC) investigations, for example.

Lee Chun Fai: Had we done the deal while [Pestech’s MACC] case was still pending, that would have caused a controversy. Fortunately, it looks like MACC accepts the arguments [put forth by Pestech] and the charges have been dropped.

They (Pestech) do have some problems, namely the rise in [raw] material prices and the [movement restrictions] during the Covid-19 pandemic. They were managing fine but last December, they were called in for questioning [by MACC] and then charges were pressed in January. That’s when the alarm bells rang and the drawing down of some of their [credit] facilities came to a halt, while [other creditors] put a limit on their facilities. Over time, that caused a strain in their cash flow.

Does Pestech suffer from a poor reputation in the market?

What Pestech has gone through during this period is admittedly concerning. The headlines do look concerning, but if you dig deeper, systems players used to be foreigners. It is amazing that [Pestech] as a Malaysian company [broke through and clinched those jobs]. Pestech is building its own capabilities, and 70% of its business is in energy transmission, less than 30% in rail … But that which has garnered much attention is its rail-related work.

What is it that IJM sees in Pestech? Couldn’t you have hired the requisite talent or formed a joint venture?

It’s been suggested to us that we hire energy transmission specialists, but this won’t work. You can’t just have the people without the track record, certifications and licence as a service provider. We could do a joint venture, but [our proposed acquisition of Pestech] involves bidding for projects together.

Does Pestech’s debt levels worry you? At RM1.3 billion …

Where it went wrong for them is this — when you do a deferred payment, banks don’t lend the full 100%. For instance, for a RM300 million project, the bank would typically lend 70%. Pestech never had a capital call until recently. They have always obtained short-term loans to roll over from the money they make from construction jobs. This is where the big cash crunch happened.

For IJM, it is very clear to us that long-term money cannot be used for short-term [payments] because the interest rates can shoot up to 10% — we have seen this before — and you would need to cover it with existing projects, which never fully [settles] it. Pestech is a small company that has done very well to grow its business. But being the entrepreneur-driven entity that it is, it is not designed to weather a storm like Covid-19, followed by the suits.

Some people say this acquisition by IJM is a bailout of Pestech.

It is a willing-buyer, willing-seller situation. Of course, Pestech wanted a higher price while we wanted a lower price … 15.5 sen was what was finally acceptable to both sides.

You think Pestech’s shareholders will bite?

This was not a price that Pestech wasn’t confident about getting shareholders’ approval. It has to be a price that works for them. To those who say this is a bailout, this is different from buying into an entity with a loan and without a source of repayment. Here, there is a source of repayment with just a timing difference. Our due diligence has made sure that the loan will be taken care of.

So you think Pestech’s shareholders will agree to IJM buying in at 15.5 sen?

To them, it’s either zero or something. It would take investors to trust [Pestech] given its past problems and some of them snowballing. It needs an immediate [cash] injection. During our due diligence, we discovered things. There will be some issues but it’s a risk that can be balanced with what we can do with the company.

Is IJM confident that its investment in Pestech will bear fruit?

It’s our head on the chopping board.

What about the waiver from the Securities Commission Malaysia (SC)?

The shareholders will have to vote on it. That’s how it typically goes with the SC. If shareholders agree, then it goes to the regulator. The shareholders are key.

How did the deal come about? Did Pestech approach IJM?

The suggestion for the acquisition came from friendly bankers and advisers. Pestech did go around town [looking for investors]. But when the cases happened, potential suitors fled. It was not an easy negotiation. It took months.

When the price was agreed on, our board felt more comfortable about the deal. If you want to create value, you want a good asset, and you have to work for it.

There are some who are spooked as it brings back memories of Scomi Group Bhd, in which IJM lost a considerable sum of money.

There were lessons learnt … we were not in the oil and gas sector, therefore [Scomi] was running the business. So this time, we cannot let the company run as it wishes. IJM will have two board seats in Pestech but we have an understanding that IJM will not control [the company] because I don’t want a consolidation [in IJM’s financial statements].

IJM will work on professionalism, governance structure, how to go about bidding for a project, project pricing … we go through a very rigorous process. We also want risk management to be done properly. Rather, we want some of our best practices to be synonymous with both companies.

To Paul [Lim Pay Chuan], that’s our skin in the game. The biggest loser in this whole saga is Paul and his uncle [Lim Ah Hock]. Their shares will be diluted and their image is battered. So now, this is a time of redemption for them.

Why 44.8% of Pestech? Why not the whole thing?

We will work with Pestech’s management. We have significant influence, though not control.

Will IJM increase its stake in Pestech once things get better?

IJM will keep an open mind.

There are often comparisons made between IJM and Gamuda Bhd. Some say Gamuda, which was once considered IJM’s competitor, has forged ahead …

We don’t buy big swaths of land just like that … we create, we develop land banks. Gamuda is an outlier, they have monetised their water and toll road accesses successfully, whereas IJM has a more measured growth [strategy]. We are a synergistic group. We do things that create value, which is to build bases because that has value in the long run. Unfortunately, there has been noise in the last few years with people saying that we haven’t been aggressive enough. But that’s also because we are a very conservative company.

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