Aviatron acquisition earnings dilutive for SAM Engineering

PETALING JAYA: Analysts remain neutral on Sam Engineering & Equipment (M) Bhd’s acquisition of Aviatron (M) Sdn Bhd due to single customer risk and the absence of a profit guarantee provided in the deal.

Recently, SAM Engineering announced it was acquiring a 100% stake in Aviatron for RM203mil cash from its own major shareholder Singapore Aerospace Manufacturing Pte Ltd (SAMPL) and settle the RM201mil shareholder loan Aviatron took from SAMPL.

A key supplier of nacelle beams used in Boeing and Airbus aircraft, Aviatron manufactures aircraft structure parts as well as precision and engineering components.

CGS-CIMB Research said SAM Engineering plans to undertake a one-for-four rights issue for 135.4 million shares to be issued at an indicative issue price of RM4.12 per share.

“The proceeds of about RM557.8mil will be used to fund the acquisition and repay SAM Engineering’s existing debt of about RM149.9mil.

“SAMPL will underwrite the entire rights issue on a full subscription basis.

“Assuming SAMPL ends up underwriting 100% of the rights issue, its shareholding in SAM Engineering will increase from 62.5% to 70%, and will not trigger a mandatory takeover offer,” the research house said in a report yesterday.

SAM Engineering expects the acquisition to be completed by the first quarter of 2024, with the related-party transaction requiring the approval of its minority shareholders.

“All else being equal, based on Aviatron’s audited financial statements, the transaction would be earnings dilutive for SAM Engineering.

“In our view, the synergy would be limited to administrative synergies as some of SAM Engineering’s costs and revenues are tied to Aviatron and would largely be netted off,” CGS-CIMB Research wrote in its report.

The research house added that should Aviatron’s net profit recovers to its pre-Covid-19 pandemic levels of RM24.4mil in financial year 2019 (FY19), this would present upside risk to the acquisition deal.

CGS-CIMB expects SAM Engineering’s aerospace earnings to recover to pre-Covid levels by FY26.

The research house, however, maintained its “hold” call on SAM Engineering with a target price (TP) of RM4.95 a share, saying that the company’s growth will be led by its equipment division and exposure to the front-end semiconductor industry.

“Upside risks to our hold call include faster-than-expected recovery in Airbus and Boeing’s aircraft production rates, which will accelerate the recovery of its aerospace earnings, and lower-than-expected operating costs.

“The downside risks are slower recovery in Airbus and Boeing aircraft deliveries, as well as higher-than-expected operating costs,” the research house said.

Meanwhile, Hong Leong Investment Bank (HLIB) Research is not particularly positive on the deal due to single customer risk, which contributed more than 85% of the group’s revenue in FY21 to FY23.

“There was also no profit guarantee provided in this transaction despite the high price-to-earnings valuation based on FY23 earnings.

“We prefer SAM Engineering to increase its exposure in the semiconductor sector, especially in the front-end supply chain,” the research house said in a report.

HLIB Research said the global semiconductor industry is going through a cycle of inventory correction and there is considerable slowdown in demand for both data storage and consumer electronics segments globally.

“We highlight SAM Engineering’s Thailand expansion will take some time before breaking even, albeit narrowing losses in each subsequent quarter,” it said.

HLIB Research maintained a “hold” call on SAM Engineering with a TP of RM4.76 a share.

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