Target Price: SGD0.74
Built To Last
Mencast is a maintenance-repair-overhaul (MRO) service provider to multiple points along the value chain of the oil & gas industry. Having delivered an earnings CAGR of 21% over the last 5 years, the company is targeting for similar growth through 2020. With its strong cash generation ability, the company remains on the lookout for acquisitions. Initiate coverage with BUY and SGD0.74 TP, based on 11x FY14F EPS.
• Recurring long-term business with growth. While oil & gas capital spending can be volatile, operating expenditure (opex) is a necessity. Mencast, whose businesses tap into the opex streams of the international and national oil majors, recently won three-to-five-year contracts. Its new facilities at Penjuru Lane that will service drilling equipment will provide another highly-recurring income stream.
• Highly-specialised businesses command high margins. Mencast’s business activities including diving, high-elevation rope access and sludge reclamation are highly technical in nature. As these cannot be easily replicated, this allows the group’s three business segments to maintain gross margins ranging from 25% to > 45%.
• Clear roadmap for growth. In his roadmap, Mencast executive chairman/CEO Mr Glenndle Sim, who was the winner of Ernst & Young’s 2013 Entrepreneur of the Year Award for Marine and Offshore, has set a “Big Hairy Audacious Goal” (BHAG) of exceeding SGD50m in bottomline by 2020. We see potential acquisitions in FY14F-15F speeding up this process, thus providing upside to our still-conservative estimate of only SGD40m for FY20F.
• Strong cash generation to fuel valuation and dividend. Mencast is one of the few companies with a negative cash conversion cycle, ie it requires very little working capital. Our DCF value for the stock works out to SGD1.27 per share at a 10% WACC.
• Long-term growth potential. Initiate coverage with BUY, SGD0.74 TP. Mencast is well on the path of sustainable high growth and healthy cash flow. The stock’s valuations are undemanding at 8.1x/6.5x FY14/15F P/Es for 44%/25% core earnings growth. Our SGD0.74 TP is pegged to 11x FY14 EPS.