Kenanga Research said it is “cautiously optimistic” about the proposed listing, pending further clarity on key details, particularly EIP’s IPO pricing.
PETALING JAYA: The proposed listing of OCK Group Bhd
’s 52%-owned energy solutions subsidiary, EI Power Technologies Sdn Bhd (EIPT) may result in earnings dilution, says Kenanga Research.
The research house said OCK’s effective stake in EI Power Bhd (EIP) will drop to 37.2% post-initial public offering (IPO) from 52% in EIPT.
“This raises the possibility that EIP’s future profit contribution to OCK may fall short of prelisting levels unless earnings growth at EIP exceeds the dilution impact from the enlarged share base,” Kenanga Research said in a report on OCK yesterday.
Last month, telecommunications network solutions provider OCK said it intends to list EIPT, via a new listing vehicle, EIP, on the ACE Market of Bursa Malaysia.
EIP will acquire the entire equity interest in EIPT from OCK and other vendors, namely, Albert Chang Wan Siong and Siew Wei Foo, for RM9.47mil.
This will be settled via the issuance of 570.5 million new EIP shares at an issue price of 1.66 sen per share.
Chang, who co-founded EIPT, holds a 32% stake in the company, while Siew owns 16%.
Meanwhile, OCK and Chang will nominate their joint venture, Energy Ikon Sdn Bhd to receive 357 million shares in EIP on their behalf.
Post-transaction, OCK will hold 6.6% direct interest in EIP and 51% indirectly via Energy Ikon.
Accordingly, OCK will continue to consolidate EIP Group’s earnings.
Under the listing proposal, EIP plans to launch an IPO comprising a public issue of 129.5 million new shares and an offer for sale of 70 million existing shares, representing a combined 28.5% of the enlarged share capital.
EIP’s enlarged share capital is expected to increase to 700 million shares upon completion of its IPO.
Kenanga Research said it is “cautiously optimistic” about the proposed listing, pending further clarity on key details, particularly EIP’s IPO pricing.
“Our positive outlook is underpinned by potential benefits for OCK post-listing, including illumination of EIPT’s value, as a transparent valuation benchmark for EIP could enhance OCK’s profile as a diversified conglomerate.
“EIP will have the option to raise equity funding to accelerate growth, and continued control by OCK enables the group to capture operational synergies,” the research house said.
Based on conservative estimates, Kenanga Research said the implied value of OCK’s post-IPO stake in EIP could rise up to RM58mil or about 2.2 times its current valuation of RM26.8mil for EIPT.
“Our key underlying assumptions include EIPT’s current valuation based on 5.7 times last year’s price-earnings ratio (PER) aligned with our forward PER target for OCK, EIP achieving an IPO valuation of up to 16 times next year’s PER and broadly in line with listed mechanical and electrical peers, and EIP delivering a two-year profit after tax compound annual growth rate of up to 4% over last year’s actual results to next year’s forecast results.
“At this valuation, OCK’s stake in EIP translates to up to 5.4 sen per share, or about 14% of our current target price,” the research house said.
Kenanga Research has a “market perform” rating on OCK with a target price of 39 sen.
