KUALA LUMPUR (March 1): Shares in AWC rose as much as 3.17% in morning trade today after the group unveiled plans to diversify its engineering services business to include rail-related works via the acquisition of a 60% stake in Trackwork & Supplies Sdn Bhd for RM43.5 million.

At 11.10am, AWC was up 2.5 sen to 81.5 sen with 455,800 shares crossed hands, for a market capitalisation of RM212.55 million.

Over the past 12-months, the counter has fallen about 17.69%.

AWC said the proposed acquisition is expected to provide an additional source of revenue and profit to the group, according to its filing with Bursa Malaysia yesterday.

AWC said it had entered into a conditional share sale agreement with Goh Poey Hong, Chong Kim Loong, Goh Tse Woei, Kong Keat Voon, Chong Chong Hong, Lim Huey Yih and Shaun Chan Thiam Eng for the proposed stake acquisition.

Out of the RM43.5 million purchase consideration, RM20 million will be satisfied through cash and the rest the issuance of new shares in AWC.

The deal comes with a net profit guarantee of RM20 million for the financial years ending Sept 30, 2018, and 2019 (FY18 and FY19). “As a pledge for the cumulative profit guarantee, such cumulative number of consideration shares worth RM12 million will be withheld,” said AWC.

Meanwhile, CIMB Investment Bank Bhd analyst Walter Aw said the research house is positive on this acquisition as it will be earnings accretive for AWC.

“After accounting for lower interest income (AWC is in a net cash position) and a larger share base (by tranches), our back-of-the-envelope calculations indicate that AWC’s FY18-20F earnings per share could potentially increase by 16.3% to 23%,” he said in a note yesterday,

He added post the acquisition, AWC will still be a net cash company with estimated cash reserves of RM59.8 million (based on end-1HFY18 results).

The research house has maintained “Add” rating on AWC with an unchanged target price of RM1.28.

“At this juncture, we have yet to incorporate potential earnings accretion into our estimates pending the completion of this acquisition. If reflected, the potential upside to our target price is 10.9%, bringing our target price to RM1.42,” he said.

CIMB Research said the downside risks to include unexpected cessation of awarded contracts and termination of this proposed acquisition.