HSS Engineers to buy water specialist SMHB Engineering for RM270m

KUALA LUMPUR: HSS Engineers Bhd (HEB) signed a heads of agreement (HoA) last Friday to acquire the entire share capital of SMHB Engineering Sdn Bhd for RM270 million, marking its entry into the water sector.
“The signing of the HoA unites two leading powerhouses of the engineering consultancies in the country. Our combined size, engineering skills and track record will expand our scope of services as well as enhance the value proposition to clients,” HEB executive director Tan Sri Kuna Sittampalam told reporters at the signing ceremony.
HEB shares, which were suspended from trading on Friday, last traded at RM1.14. Its share price has increased 188.6% year-to-date.
While HEB specialises in highways and railway infrastructure, SMHB’s expertise lies in the water sector across treatment works, distribution, dams, flood mitigation, irrigation and environmental services.
For its financial year ended April 30, 2016, SMHB reported net profit of RM25 million on revenue of RM93 million. As a combined entity, HEB’s revenue would increase from RM139 million to RM232 million, earnings before interest, tax, depreciation and amortisation (ebitda) would increase from RM23 million to RM58 million while net profit would increase from RM14 million to RM39 million.
HEB and SMHB currently have order books worth RM400 million and RM338 million respectively, giving the enlarged entity a total order book of RM738 million. Their tender books stand at RM250 million and RM215 million respectively, giving the enlarged entity a combined tender book of RM465 million.
Kuna said the current order books would last about three to five years, depending on the complexity and duration of the projects in hand. He said post-merger, the group will have a team of over 1,000 employees with more than half comprising professional engineers.
According to Kuna, the two parties first met to discuss the possibility of a merger as far back as 2005 due to the compelling fit between water, infrastructure and transportation, and held “serious talks” for close to a year, before agreeing on a deal.
“Our concern is with Malaysia becoming signatory to GATS (General Agreement on Trade in Services). With Malaysia fulfilling its obligations under that agreement, you will see more international players coming in,” he said.
He said in the engineering consulting space, many major players are going through mergers and acquisitions as projects become bigger and more complex, which require better skill sets and bigger pool of engineers.
“We didn’t have the capital to compete effectively with international players, that’s one of the reasons why we decided we will go to the market. Now, with our scale and skill sets, we are far more strongly positioned to look in the first instance, regionally, Asean, then probably the Middle East and India. These are our target markets going internationally,” he said.
The RM270 million price tag comprises RM162 million cash, to be raised from 50% bank borrowings and 50% placement and rights issue. The balance RM108 million will be satisfied via the issuance of new HEB Group shares at RM1.14 a piece.
“What we have signed today is the HOA. If you go through the details of the announcement, we are going to enter into a definitive sale agreement in a month’s time. I think at that time we will be clearer about what SMHB will hold, the original promoters will hold. We will disclose the details at the appropriate time,” said executive director and CEO Datuk B. Nitchiananthan.
The RM270 million is at an enterprise value over ebitda of 7.7 times. HEB expects its gearing level to be “very manageable” at less than 0.5 times post-merger.
The exercise is subject to approvals from the authorities and HEB Group shareholders, and is expected to be completed in the first quarter of 2018. Maybank Investment Bank Bhd is the principal adviser to the corporate exercise.