Current Price S$0.51
Fair Value S$0.67
Acquisition spree again
Earnings below expectations. Mencast’s 3Q13 profits of S$1.6m came in 40% below our estimates due mainly to lower-than-expected gross profit margins. This should not ring alarm bells as 3Q has historically been weaker in the previous FYs and we expect 4Q to jump back up, as such we maintain our FY13 estimates for the time being. However, as we adjust our FY14-15 sales for the new acquisition, our net profit forecasts remain relatively unchanged. We lower our fair value to S$0.67 from S$0.71 on the assumption of the new share dilution upon the completion of the acquisition, still pegged at 10x FY14 PER. Given the 36% potential upside, maintain
New acquisition. It announced on 8 Nov-13 to acquire Chinyee Engineering (CYE) for S$11m, to be paid in three tranches of cash and shares. It will use S$8.3m of the proceeds from the S$50m notes due 2016 and 6.5m new shares to pay for the acquisition. This makes it the sixth company to be acquired in the past two years.
How will CYE contribute? CYE is a precision engineering firm with 40 CNC machines. Around 75% of its revenue comes from Cameron International and FMC in the oil and gas industry. CYE will complement Mencast’s current facilities in the offshore and engineering segment by quickly adding the manufacturing capabilities immediately and leverage on Mencast’s client base to expand. Although CYE is currently loss making, we believe Mencast should be able to integrate CYE into its business and thus create a positive contribution to the group from FY14 onwards.
3Q13 revenue increased 18% yoy to S$25.6m, led by increases in its marine segment by 26% yoy. Its offshore engineering segment also increased 6% yoy. Its energy services, contributed S$2.3m in 3Q13, a 48% increase yoy.
Tapping on the capital markets to fund growth. Mencast generated S$11.3m negative free cash flow in 3Q13 which was a result mainly due to increased capex spending of S$11m. In addition, it raised S$50m in fixed rate notes due 2016 to fund part of the acquisition of CYE and for its capex plans. As a result, net gearing increased to 77% as at end 3Q13 as compared to 68% as at end 2Q13. Given the continued capex spending to expand its capacity and ramp up revenue from overseas operations, net gearing will continue to be high for our forecast three year period.