This article first appeared in The Edge Malaysia Weekly, on October 12 - 18, 2015.

IN a period of slowing growth, companies with sizeable work orders would be on a firmer footing than those still trying to gain business. In this respect, Fututech Bhd stands out among mid-sized construction companies.

Fututech (fundamental: 2.60; valuation: 1.80) is paying RM458 million to acquire two construction companies — Kerjaya Prosperk (M) Sdn Bhd and Permatang Bakti Sdn Bhd, with jobs amounting to RM2.3 billion — from its major shareholders Datuk Tee Eng Ho, Datin Toh Siew Chuon and Tee Eng Seng.

It will pay RM55.2 million in cash, with the rest settled by issuing RM42.8 million worth of new shares and RM360 million worth of new redeemable convertible preference shares at an issue price of RM1.16 apiece.

Fututech’s share price has rallied by 52.3% so far this year to close at RM1.54 on Oct 7.

While no analyst actively covers the stock yet, Kenanga Research’s Iqbal Zainal in a “non-rated” note dated April 30, ascribed a fair value of RM1.78 based on the 10 to 14 times earnings multiples that its peers trade at — implying 15.6% upside potential for the stock.

Alternatively, investors could bet on Fututech via its warrant, Fututec-WA, which has an 88 sen strike price and one-for-one conversion ratio, and expires in December 2017.

Closing at 54.5 sen last Wednesday, Fututec-WA was trading at an 8% discount to the underlying shares. If Fututech appreciates 15.6% to Kenanga’s RM1.78 target price, Fututec-WA would theoretically be worth some 65% more at 90 sen, assuming zero discounts to the underlying stock.

Still, Fututech’s major shareholders may have to place out some shares as they will own over 90% of the company post the exercise. The potential share overhang or EPS dilution from new share issuances may dampen sentiment, Kenanga notes.  

The proposed acquisitions are aimed at turning Fututech into a specialist contractor of high-rise buildings, says group executive chairman Eng Ho.

The proposed acquisition of Kerjaya Prospek will come with an aggregated profit guarantee of RM150 million for three years, he says in a press release dated Sept 15. “So this proposed acquisition itself presents an immediate and guaranteed value for the company once the exercise is completed.”

Fututech’s current construction portfolio includes The Shore project in Melaka, Bandar Tanjong Pinang Phase 2 and a 73-unit residential project in Bukit Serdang. It is also developing Vista Residences in Genting Highlands and a 349-unit apartment development in Shah Alam.

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