PETALING JAYA: QL Resources Bhd’s move to up its stake in Boilermech Holdings Bhd will have minimal financial impact, but is long-term positive from an environmental, social and governance (ESG) perspective.
With the ESG criteria gaining importance amongst investors, the proposed acquisition is a good fit for QL’s current ESG efforts and growth strategy, said analysts.
Boilermech has a footprint in clean energy, given its business operations involving boilers, which generate energy from biomass. The company has also ventured into solar energy through the purchase of a solar company in May this year.
QL, which farms and manufactures eggs and fish substitutes, believes that Boilermech is well-positioned to participate in the growing clean energy space.
Hence, the acquisition would allow QL to increase its business exposure within the ESG sector in addition to acquiring an earnings accretive asset to the group, said TA Research.
The research firm thinks that Boilermech may potentially help QL in solar projects at its marine and integrated livestock farming sites.
Last Thursday, QL entered into an unconditional share acquisition agreement with Boilermech’s managing director, Leong Yew Cheong, (pic) to acquire 20.64 million shares or 4% of its total issued shares.
QL is paying RM19.6mil cash or 95 sen per Boilermech share for that block, valuing the latter at RM490.2mil.
This, according to MIDF Research, values Boilermech at an estimated 21 times the price earnings (PE) ratio – higher than other Bursa-listed palm oil related equipment manufacturers such as Muar Ban Lee Group Bhd and CB Industrial Product Holding Bhd.
Following the acquisition, QL’s interest in Boilermech increased from 44.15% to 48.15%. It triggered a conditional mandatory general take-over offer (MGO) for the balance Boilermech shares not already held by QL at 95 sen per share and is conditional upon acceptance of more than 50% of the shares.
However, shares of Boilermech closed higher on Friday at 98 sen.
Analysts opined that the acquisition is “slightly on the high side as the stock’s PE multiple would be approximately +1 standard deviation above Boilmermech’s five-year average of 16.2 times”.
QL targets to complete the offer by the first quarter of 2021 and intends to maintain Boilermech’s listing status.
Financially, based on Boilermech’s financial year 2020 (FY20) earnings of RM24.1mil, the additional 4% interest in Boilermech would result in QL’s core profit after tax (PAT) rising by about RM1mil, which is less than a 1% increase in the FY21 forecast earnings.
Proforma net gearing, meanwhile, would rise from 51.3% to 52.3%.
In the event the conditional mandatory offer receives full take-up, QL’s PAT would rise by about RM13.4mil (or a 5% increase in the FY21 forecast earnings) and proforma net gearing from 51.3% to 65.3%.
As for Boilermech, analysts said the exercise is positive for the company.
With QL’s strong balance sheet, it can help the biomass boiler maker to expand in its clean energy businesses such as water treatment and solar energy segments.
“Moreover, we believe the acquisition will strengthen Boilermech’s existing presence in the biomass boiler sector, given QL’s synergistic business plan as palm oil and milling activity is one of its core businesses.
“Boilermech’s foray into solar energy will boost its recurrent earnings and reduce reliance on its traditional business amid the cyclical nature of the plantation sector, ” said JF Apex Research in a report.
However, some think the earnings contributions from solar energy would take time to be significant.
For its FY21 second quarter ended Sept 30 (Q2), QL’s net profit came in flattish year-on-year at RM70.1mil and its cash level stood at RM446.5mil as at that period.
Boilermech’s Q2 net profit was RM6mil, an improvement from Q1’s RM2.3mil due to improved project deliveries and contribution from the solar business. Shares of QL closed two sen down to RM6.18 on Friday, giving the stock a market capitalisation of RM15bil.