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

AWC Bhd
(July 31, 71 sen)
Maintain add with an unchanged target price of RM1.00: AWC Bhd on Feb 28 stated its plans to acquire a 60% stake in Trackwork and Supplies Sdn Bhd for RM43.5 million. The acquisition was slated for completion by the end of second quarter of financial year 2018 and was valued at 8.1 times calendar year 2018 price-earnings ratio.

However, AWC on June 5 announced that Trackwork and one of its international principals, Gemac, had received a demand letter from a customer for RM19 million with regard to defective equipment supplied. As a result, AWC requested to postpone the completion of this acquisition by three months to reassess the implication of this claim.

AWC highlighted that the settlement amount for this demand had been agreed at RM14.1 million among all three parties. Gemac also on June 14 issued a letter stating that it would be solely responsible for the full payment of the settlement, and that Trackwork would be fully discharged from all liabilities and obligations with regard to this settlement amount. This is positive for Trackwork, indicating that it will not face any financial implication from this issue.

We understand that AWC is aiming to complete this acquisition by end-September 2018. It remains bullish on Trackwork’s prospects with regard to its expertise and experience in rail-related industry. Despite recent negative news flows especially the potential cancellation and/or deferment of major rail projects in the country, AWC is of the view that this will lead to more opportunities for Trackwork in terms of upgrading and rehabilitation work for existing rail systems in Malaysia.

In addition, AWC is confident that Trackwork will be able to deliver the collective net profit guarantee of RM20 million in FY18 to FY19. This will be backed by its order book of RM120 million (as at end-February) that mainly consists of supply, installation, and commissioning of various track materials and track-related machinery. Based on our back-of-an-envelope calculation, AWC’s earnings per share for FY19 to FY20 could increase 11.3% to 14.2% post completion of the acquisition. — CGSCIMB Research, July 31