Kejuruteraan Asastera to tap debt market to build RM500 mil energy war chest

This article first appeared in The Edge Malaysia Weekly, on March 22, 2021 - March 28, 2021.
Lai says KAB is in talks to acquire brownfield solar power plants locally and overseas, and expects at least one acquisition this year. (Photo by Haris Hassan/The Edge)

Lai says KAB is in talks to acquire brownfield solar power plants locally and overseas, and expects at least one acquisition this year. (Photo by Haris Hassan/The Edge)

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MECHANICAL and electrical (M&E) engineering company Kejuruteraan Asastera Bhd (KAB) is tapping the local debt market for the first time to raise up to RM500 million to fund the group’s expansion plans in the energy efficiency solutions and energy generation segment.

KAB managing director Datuk Lai Keng Onn says proceeds from the planned issuance will be used for working capital and takeover activity in the green energy sector. Until a year ago, the group had mainly focused on providing M&E engineering services.

He declined to provide details on the debt offering except to say that the group is currently in talks to acquire brownfield solar power plants locally and overseas, and that he expects at least one acquisition this year.

This would be on top of its proposed acquisitions of a 2.2mw waste heat recovery facility in Bandar Sri Sendayan, Negeri Sembilan, and a 2mw cogeneration facility in Klang, Selangor, for a combined RM12.03 million. Earlier this month, KAB announced that it was acquiring Konpro Industries Sdn Bhd and Meru One Sdn Bhd, which own the waste heat recovery and cogeneration facilities respectively.

More recently, KAB appointed Datuk Dr Ong Peng Su to serve in the newly created role of adviser to the group to help it identify potential power plants as well as new customers. Ong is former CEO of independent power producer Powertek Bhd, as well as former CEO and executive director of Tanjong Energy Holdings Sdn Bhd, which was acquired by 1Malaysia Development Bhd in 2012.

“Ong brings over 30 years of experience in the energy industry. With his experience, we hope he will take our energy segment to the next level. One of our goals is to expand [our energy business segment] overseas,” Lai tells The Edge in an interview.

KAB currently has a presence in Thailand via its 80%-owned subsidiary Energy Optimization (Thailand) Co Ltd, which is involved in implementing energy saving solutions. The company is currently providing chiller optimisation solutions for Robinson Department Stores in Thailand.

“We are in the midst of setting up a company in Vietnam. We are also looking at Laos. For the time being, we will look to grow our energy business overseas and not the electrical engineering business as the latter requires huge manpower,” says Lai, who is also the group’s largest shareholder with direct and indirect stakes of 37.74% and 1.4% respectively as at Jan 18, 2021.

As at Dec 31, 2020, KAB had RM28.23 million in cash and RM28.54 million in total debt, leading to a net debt of RM311,000 and gross gearing of 0.36 times.

KAB acquired four companies in the past two years and with a potential war chest of RM500 million from the planned debt issuance, it looks like it is not done with its acquisition drive. Lai says its lenders allow the group to borrow up to 1.0 to 1.5 times of its equity, which would translate into additional debt headroom of between RM51.58 million and RM91.65 million. This implies that the RM500 million in borrowings would likely be drawn down in several tranches, spread out over several years in order to meet the 1.0 to 1.5 times gross gearing limit. This is because it would take time for the group to grow its shareholders’ funds, which stood at RM80.13 million as at Dec 31, 2020.

“While M&E engineering services remain our core business, we have been diversifying our service offerings to include energy efficiency solutions and energy generation via cogeneration, waste heat recovery and solar towards the end of the financial year ended Dec 31, 2019 (FY2019),” says Lai, adding that the energy efficiency solutions and energy generation segment will also give KAB a sustainable recurring income stream as these contracts usually have a longer tenure than M&E engineering contracts.

2021 an ‘exciting year’ for KAB

Lai says 2021 is poised to be an “exciting year” for the group with the proposed fundraising and as its ventures into energy efficiency solutions and energy generation start providing earnings visibility from the third quarter of FY2021. In FY2020, KAB’s net profit dipped 47.9% year on year to RM5.43 million while revenue declined by 5.5% to RM150.81 million, primarily due to increased staff costs and the temporary suspension of project operations and supply chain disruptions owing to the first Movement Control Order in March last year. It currently employs 178 people.

“Earnings also came in lower due to a RM2 million loss incurred by new subsidiaries in Thailand and Malaysia. However, I expect these new subsidiaries to return to the black in FY2021 as we have everything in place and the projects are moving,” he says.

The group’s net profit and revenue are on track to return to pre-Covid-19 levels and even surpass levels recorded before the pandemic this year, says Lai, if 4QFY2020 results are any indication that the worst is over. Net profit for the quarter was RM2.47 million, up 80.7% from the previous quarter on revenue of RM49.32 million, which increased 13.3% quarter on quarter. The group recorded net profit of RM10.41 million on revenue of RM159.62 million in FY2019.

As at Dec 31, 2020, KAB’s order book stood at RM373 million, which will keep it busy for two to three years.

“We are also tendering for RM214 million worth of jobs (as at end-January), where our success rate has been about 30%. We will participate in more tenders as property developers gear up for new launches and construction starts to move again,” he adds.

Apart from acquisitions, KAB is also on the lookout for partnerships in new technologies. Lai says the group recently partnered with MTU Power Systems Sdn Bhd — a joint venture between Sapura Resources Bhd and Rolls-Royce Power Systems AG’s unit MTU Asia Pte Ltd — to use the latter’s engines in its cogeneration projects. For its waste heat recovery projects, KAB will be using turbines from Italy’s Turboden SpA.

 

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