Hong Leong Asia has room for “synergistic collaboration” with its newly acquired 20% stake in BRC Asia, says CGS-CIMB Research analyst Ong Khang Chuen.
Following combination of new share placement and married deals, Hong Leong Asia will have a 20% stake in BRC Asia, up from 3.6% previously, becoming its second largest shareholder.
In an Aug 30 note, Ong is maintaining his “add” call on Hong Leong Asia with an unchanged target price of $1.05, which represents a 25.7% upside.
The subscription price of $1.48 per share is a 2.06% discount to Aug 27’s volume-weighted average price (VWAP), with total new investment cost of $68.1 million. “We estimate the deal values BRC at approximately nine times 2022F price-to-earnings ratio (P/E),” writes Ong.
In addition, Hong Leong Asia may request to nominate two seats to BRC’s Board of Directors.
See: Hong Leong Asia to pay $68.1 mil to bring stake in BRC Asia to 20%
See also: PhillipCapital keeps estimates on BRC Asia unchanged after increase in stake by Hong Leong Asia
The proposed subscription will require BRC Asia’s EGM approval. Esteel Enterprise, the controlling shareholder of BRC with a 69% stake currently, has undertaken to vote in favour of the resolution. The transaction is expected to close on Dec 31, 2021.
“We are positive on this deal as we see synergistic collaboration between both parties, which are market leaders in the supply of their respective type of building materials (Hong Leong Asia in ready-mix and precast concrete, BRC Asia in reinforced steel),” says Ong.
“We see greater collaboration between Hong Leong Asia’s precast concrete segment and BRC’s steel reinforcement solutions to increase automation opportunities within prefabricated prefinished volumetric construction (PPVC) building technology and potential joint overseas expansion opportunities in China or Southeast Asia, where trends towards improving productivity in the construction sector are emerging,” he adds.
In terms of financial impact, Ong estimates approximately 8% FY2022F earnings per share (EPS) accretion for Hong Leong Asia with this investment. Meanwhile, the share placement could lead to some 12.75% share dilution for BRC Asia.
“While we see near-term weakness in 2HFY2021F, Hong Leong Asia remains on track to achieve 47% y-o-y growth in PATMI in FY2021F to $60 million. “We also continue to like BRC Asia as it is a proxy for Singapore’s construction sector recovery and given its likely strong dividend yield for FY9/2021F exceeding 5.5%.”
For more stories about where the money flows, click here for our Capital section
As at 1.50pm, shares in Hong Leong Asia are trading 1 cent lower, or 1.16% down, at 85 cents, which represents 8.87 times P/E.
Meanwhile, shares in BRC Asia are trading 2 cents higher, or 1.35% up, at $1.50.