This article first appeared in The Edge Financial Daily on March 1, 2018

KUALA LUMPUR: AWC Bhd is proposing to diversify its existing engineering services business to include rail-related works via the acquisition of a 60% stake in Trackwork & Supplies Sdn Bhd for RM43.5 million.

AWC said the proposed acquisition is expected to provide an additional source of revenue and profit to the group.

Trackwork’s principal activities include supplying of track materials and rolling stock, maintenance of railway tracks, supplying and commissioning of track tools, equipment and machineries, as well as supplying of depot equipment, tools and track diagnostics and monitoring systems.

In a 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.

Additionally, Trackwork has a secured order book of RM120 million for the supply of track materials/machineries/fittings and a secured sales commission income of RM6.8 million from contracts secured by their international principals for FY18 and FY19.

AWC also signed a shareholders’ agreement with Trakniaga Sdn Bhd, which holds the remaining 40% stake in Trackwork, to govern the management and operation of Trackwork upon completion of the proposed acquisition. A call/put option has also been put in place to ensure that Trakniaga does not dispose of its shareholdings in Trackwork to other parties and to minimise unnecessary disputes going forward.

Meanwhile, AWC said it will seek the approval of its shareholders at a forthcoming extraordinary general meeting to undertake a proposed diversification of the group’s existing core business to include the rail-related works, which it sees the eventual contribution to be more than 25% of the group’s net profit.

“[We] believe that the proposed diversification will contribute positively to AWC Group’s future earnings. Consequently, the proposed diversification may reduce the group’s reliance on its existing core business,” it added. AWC plans to finance the acquisition and option price via internal funds and/or bank borrowings.

“Barring any unforeseen circumstances and subject to the approvals being obtained from the relevant authorities, the proposals are expected to be completed by the second quarter of 2018,” said AWC.

AWC shares will resume trading today after having been suspended for a day.