SLVEST is acquiring a 30% stake in waste gas abatement manufacturer SIW Manufacturing Sdn Bhd (SIW) from two individuals for RM36m cash, translating into FY24F (Dec) and FY25F PERs of 8.6x and 7.5x based on a net profit guarantee of RM14m and RM16m over the two respective years. We are positive on the acquisition that provides synergy and is accretive to earnings. We raise our FY25-26F earnings by 1-5%, respectively, lift our TP by 2% to RM1.95 (from RM1.91) while maintaining our OUTPERFORM call.

SLVEST is acquiring a 30% equity stake in SIW from two non-related individuals, who respectively own 80 and 20% of SIW, for RM36m cash. SIW is primarily engaged in the manufacturing of waste gas abatement machine and gas system related modules and components for semiconductor industry. The acquisition comes with a net profit guarantee of RM14m and RM16m for FY24 and FY25, respectively, and is expected to be finalised by 31 December 2024.

The deal values the asset at 8.6x and 7.5x FY24F and FY25F PERs based on the profit guarantee, which are at a discount to the forward PER of the manufacturing sector of 10x.

The acquisition will raise SLVEST's net debt and gearing of RM91.4m and 0.3x as at end-2QFY25 to RM127.4m and 0.4x, respectively, which are still highly manageable.

We view the acquisition positively as it will strengthen the group's core RE business by expanding its presence in complementary sectors with significant growth potential. The key synergy lies in leveraging SIW's ESG-focused customer base and its unique value proposition through patented technologies. SIW's semiconductor clients focus on "greening" their products by reducing harmful emissions through waste gas abatement machines. This acquisition enables SLVEST to capitalize on its existing customer relationships, offering rooftop solar system installations and renewable energy certificates (RECs), thereby supporting these clients in offsetting their carbon emissions and advancing their sustainability initiatives.

Forecasts. We raise our FY25-26F earnings by 1% and 5%, respectively, to reflect the earnings enhancement from the acquisition.

Valuations. We also lift our TP by 2% to RM1.95 (from RM1.91) based on SoP valuation, ascribing 30x FY26F PER for its EPCC segment (in-line with the average historical 1-year forward PER of the solar EPCC sector), 10x FY26F PER for its newly acquired SIW Manufacturing Sdn Bhd, and DCF at a discount rate of 5.5% to 5.6% for its LSS4, CGPP, and Powervest assets (see Exhibit 1). Note that our TP reflects a 5% premium given a 4-star ESG as appraised by us (see Page 4).

Investment case. We like SLVEST for: (i) the bright outlook of the RE market in Malaysia, underpinned by the government's strong commitment towards RE, the export potential of RE and improved commercial viability of solar power projects on falling solar panel prices, (ii) its dominant market position with a market share of over 30% in the solar EPCC space, and (iii) its strong earnings visibility backed by a sizeable outstanding order and tender books, and recurring income from a growing portfolio of solar assets. Maintain OUTPERFORM.

Risks to our call include: (i) the government dials back on RE policy, (ii) influx of new players in the solar EPCC space, intensifying competition, and (iii) escalation in project costs.

Source: Kenanga Research - 4 Dec 2024