Solarvest Holdings Berhad - Acquiring a Stake in Kee Ming Electrical
Tue, 28-Jan-2025 07:14 am
by Tan Sue Wen • Apex Research

Counter

SLVEST (0215)

Target Price (RM)

2.00

Recommendation

Buy

Executive Summary

  • Solarvest is acquiring a 30% stake in KMESB for RM15.3m, with a profit guarantee of RM6m/RM7m/RM7m for up to three financial years. 

  • We expect the acquisition to be earnings accretive and have revised our earnings forecasts by +2.1%/+5.9% for FY25F-FY26F.

  • Maintain BUY recommendation with a revised target price of RM2.00, based on a sum-of-parts (SOP) valuation, and appraised with a three-star ESG rating.

 

Acquisition details. Solarvest has entered into a Share Sale Agreement (SSA) with Mr. Liew Kar Hoe and Mr. Liew Kar Wai to acquire 30.0% equity interest in Kee Ming Electrical Sdn Bhd (KMESB) for a cash consideration of RM15.3m. KMESB engages in the provision of mechanical and electrical engineering solutions. The acquisition is expected to be completed in 1QCY25 and includes a profit guarantee of RM6m for FY25, RM7m for FY26 and RM7m for FY27 (Figure 1).  Acquisition will be funded through a combination of internally generated funds and debt financing. Assuming that 80% of the acquisition is financed via external borrowings, the Group’s FY25F net gearing is projected to increase from 0.26x to 0.58x, which is still deemed manageable in our view.

 

Our Take. We are positive on the acquisition as it will allow Solarvest to diversify its earnings stream. Based on KMESB’s FY24 net profit of RM6.1m, Solarvest’s acquisition of a 30.0% stake translates into a historical P/E of 8.4x. Meanwhile, the profit guarantees would translate into a forward P/E of 8.5x/7.3x/7.3x for FY25F/FY26F/FY27F respectively. Based on our rough estimate, KMESB's unbilled orderbook is c.RM100m, representing 2.6x the KMESB’s FY24 revenue (Figure 2). In light of KMESB's strong historical financial performance, including a two-year CAGR of 43% in net profit and double-digit margins, we consider the acquisition to be fair and well-justified, particularly in comparison of peers that are trading at c.13x forward P/E.

 

Earnings revision. We have raised our FY25F/FY26F core earnings higher by +2.1%/+5.9%, assuming that the acquisition is completed by the end of Feb 2025 and associate contribution of 30% stake from the profit guarantee of RM6m/RM7m for FY25F/FY26F respectively. 

 

Valuation. Following the earnings revision, we maintain our BUY recommendation with a revised TP of RM2.00 (from RM1.98) based on sum-of-parts (SOP) and appraised with three-star ESG rating. We believe Solarvest is well-positioned to benefit from government RE initiatives, its unique in-house solar financing, and its status as Malaysia’s largest solar EPCC player. 

 

Risk. Increase in solar module costs. Heavy reliance on government initiatives. Intense market competition.

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