• Reiterate BUY and MYR2 SOP TP (26% upside). We are positive on Solarvest’s acquisition of a 30% stake in SIW Manufacturing (SMSB), a company specialising in the manufacturing of waste gas abatement machines. This acquisition is earnings accretive and aligns with Solarvest’s clean energy focus. Leveraging on SMSB’s technology, Solarvest is well-positioned to unlock operational synergies, enhancing its existing clean energy solutions and expanding its footprint in sustainable technology.

• SMSB, incorporated in 2019, primarily focuses on manufacturing waste gas abatement machines and gas system-related modules for the semiconductor industry. The company has a strong client base and regional presence with offices and operations across Asia, including Singapore, Taiwan, and China. In FY21-23, the group reported MYR3.1m, MYR18.8m, and MYR13.0m in earnings, with margins of 3.7%, 16.9%, and 17.6%.

• The deal. The 30% acquisition, valued at MYR36m, will be paid in three tranches. The first tranche will be by 31 Dec 2024, the second by Apr 2025 (contingent upon SMSB meeting financial performance targets), and the final tranche by Jul 2025. SMSB’s guaranteed FY24 PAT of MYR14m implies a forward P/E of 8.6x, which we consider reasonable, given the growth potential of ESG-related businesses. Solarvest is likely to fund the acquisition via internally generated funds. Excluding project financing, the group is in a net cash position of MYR68.7m (as at Sep 2024). The agreement includes a profit guarantee, with SMSB committed to delivering at least MYR14m and MYR16m PAT for FY24 and FY25 respectively. The transaction is projected to raise Solarvest’s FY26- FY27 earnings by 4-5%, but the future strategic value to the group can be much greater if the complementary services and cross-selling strategy pan out well. Solarvest is granted an irrevocable 2-year put option if SMSB fails to meet the minimum PAT or minimum net tangible asset (NTA) of MYR48m with all associated costs borne by the vendors.

• Forecasts. We maintain our earnings, pending completion of this transaction. Our SOP TP of MYR2 is based on 30x P/E on FY26F fully diluted engineering, procurement, construction and commissioning (EPCC) EPS, and DCF (WACC: 5.4%) on large-scale solar 4 (LSS4) and Corporate Green Power Programme (CGPP) solar assets. It also includes an 8% ESG premium based on its ESG score of 3.4 (vs the 3.0 country median). We are positive on the acquisition as it aligns with Solarvest’s vision of becoming a leading clean energy and green technology solutions provider, solidifying its position within the clean energy and sustainable technology ecosystems.

• Downside risks: Slow replenishment of its orderbook, dependence on government policies and initiatives on RE, competition risks, and unexpected increases in project costs.

Source: RHB Securities Research - 4 Dec 2024