This article first appeared in The Edge Financial Daily on August 3, 2018

Rohas Tecnic Bhd
(Aug 2, RM1.16)
Maintain buy with an unchanged target price of RM1.74: Rohas Tecnic Bhd announced that it had entered into a non-binding term sheet with the shareholders of Phu My Vinh Construction and Investment Corp (PMV) in respect of a proposed acquisition of 40% of PMV. The proposed purchase price is about RM40.6 million and the mode of purchase consideration will be determine at a later date. PMV is the owner and operator of two water treatment plants with total combined water supply capacity of 55,000 cu m per day (55 million litres per day [MLD]) in the Long An province, Vietnam. Note that the total combined water supply capacity is expected to achieve 95,000 cu m per day (95MLD) in 2018 due to capacity expansion in one of the water treatment plants (the Hia Khnh Ty Water Supply System).

This proposed acquisition is the second venture by the company to strengthen its recurring income after the mini hydropower plant project in Indonesia. Besides, this acquisition also allows Rohas to expand and grow its water business regionally. Note that this is not the first venture in Vietnam’s water sector by Rohas as the company was involved in the Yenso water treatment plant project in Hanoi before.

Little details of expected earnings are available at this juncture. However, by benchmarking (albeit simplistically) to the Binh An Water Treatment Plant (co-owned by IJM Corp Bhd and Salcon) that has a capacity of 100MLD, the average profit contribution is about RM11 million annually. Hence, a 40% stake in PMV (total capacity: 95MLD) is expected to contribute RM4 million annual profit to Rohas once the operations of water treatment plants are stabilised post capacity expansion. The purchase price translates into about 10 times price-earnings multiple.

We estimate that Rohas’ net gearing would increase from 9% (first quarter of financial year 2018) to 21% upon completing the acquisition on a pro forma basis. — Hong Leong Investment Bank Research, Aug 2