This article first appeared in The Edge Malaysia Weekly on August 19, 2024 - August 25, 2024
THE mutual decision by IJM Corp Bhd (KL:IJM) and Pestech International Bhd (KL:PESTECH) to call off their plans to have IJM purchase a 44.83% stake in engineering outfit Pestech will not result in any loss to the construction giant, according to analysts. Under the deal, IJM would have spent RM124 million for 800 million shares in Pestech.
“There will be no impact on [IJM’s] financials. There is clarity now that the deal has been terminated,” says MIDF Research, noting that the proposed acquisition should have been completed by the fourth quarter of last year but had gone through several extensions.
In an Aug 16 note to investors, the research house says it views the termination of the deal as a positive for IJM, which would have had to account for Pestech’s losses. Pestech posted a net loss of RM73.86 million on revenue of RM145.49 million for the six months ended March 31 (1HFY2024). Its net gearing was high at 2.6 times.
“Pestech has been facing operational challenges such as fluctuations in material and equipment prices, supply chain disruptions, foreign exchange fluctuations and an increase in funding cost, leading to its weak financial performance in recent years,” says MIDF Research.
It also expects IJM to be among the key beneficiaries of the positive prospects for the construction sector, on the back of a strong pipeline of jobs that can be expected in the second half of 2024 onwards with more civil works flows, on top of private jobs and industrial building projects.
MIDF Research reiterates its “buy” call on IJM, noting that its target price of RM3.89 remains intact as it did not factor in any earnings contribution from Pestech. IJM’s share price closed at RM3.20 last Friday, giving the group a market capitalisation of RM11.2 billion. The stock has risen 71% so far this year.
Pestech announced last Thursday the termination of its agreement with IJM, previously announced in July 2023. Under the agreement, IJM had agreed to acquire a 44.83% stake in Pestech through a restricted issue scheme for RM124 million. The non-fulfilment of conditions precedent in the agreement was cited as a reason for the termination.
Sources tell The Edge that the deal was aborted after IJM failed to convince the lenders of cash-strapped Pestech to take a haircut in the latter’s loans to make its operations sustainable. The banks could not agree on terms, they say.
Pestech’s total borrowings stood at RM1.1 billion at end-March 2024, of which RM469.16 million were short-term financial obligations.
Analysts and industry observers also see the termination of the deal as a positive for IJM as its joint venture (JV) with Pestech in a consortium with Alstom Transport Systems (Malaysia) Sdn Bhd to undertake the upgrading of the automated people mover system or aerotrain project at Kuala Lumpur International Airport amounting to RM176 million remains intact.
“IJM can still tap Pestech’s expertise in energy transmission and rail electrification, while gaining exposure to France’s Alstom to bid for potential international construction jobs,” says an industry observer.
It is understood that the delivery of the first of three new aerotrains by Alstom, which are currently under construction in Wuhu, China, will be later than planned. The first train was to be delivered by end-August, but with the revised plan, it will arrive next month, they say.
Meanwhile, Pestech says it has entered into a heads of agreement with privately held construction company Dhaya Maju Infrastructure (Asia) Sdn Bhd (DMIA) to subscribe for a controlling 51% stake in Pestech for RM160.07 million or 15.5 sen per share.
DMIA will conduct a due diligence review on Pestech based on publicly available documents and/or information on the group.
Sources say that following the proposed stake acquisition, DMIA and Pestech plan to form a JV company to jointly bid for construction jobs, including Penang’s first light rail transit (LRT) project. Minister of Transport Anthony Loke said in March that the construction of the LRT project will begin by the fourth quarter of 2024. The contracts for the LRT project have been divided into three main components, he added.
Loke said Gamuda Bhd’s (KL:GAMUDA) 60%-owned unit SRS Consortium has been offered the contract for the first segment of the Penang LRT project after a single sourcing request for proposal. The other two remaining contracts will be offered on an open tender basis.
DMIA is the main contractor for the Klang Valley Electrified Double Track (KVDT) project from Rawang to Salak South and is currently undertaking Phase 2 of the KVDT project in an 80:20 JV with armed forces fund Lembaga Tabung Angkatan Tentera that covers the rehabilitation of two Keretapi Tanah Melayu Bhd railway lines of more than 265km from Salak South to Seremban and from Simpang Port Klang to Port Klang at a contract cost of RM4.475 billion.
Companies Commission of Malaysia data show that DMIA founder and director Datuk Seri Subramaniam Pillai holds a 37.5% stake in DMIA; group CEO and director Datuk Mohamed Razeek Mohamed Hussain Maricar, 21%; director Siti Saffur Mansor, 17.5%; director Nazreen Ahmad, 15%; and director Datuk Shaharuddin Md Somm, 9%.
In the financial year ended March 31, 2023 (FY2023), DMIA posted a net profit of RM23.29 million, up 176% from RM8.45 million in FY2022, while revenue rose 184% year on year to RM1.03 billion.
Pestech’s share price had fallen 38% year to date to close at 20 sen last Friday, valuing the group at RM196.9 million.
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