Mencast Holdings: Synergistic Bargain Acquisition
(BUY SGD0.54, TP: SGD0.75)
MCAST has acquired S&W and S&W Process Equipment – companies that manufacture and repair heat exchangers. We see clear synergies with its offshore engineering and energy divisions. The purchase is a bargain at 2.6x P/E, based on the average profit warranty. Thus, we raise FY14/15F estimates by 3%/7%, nudging our TP up to SGD0.75 (from SGD0.74) based on 11x FY14F P/E. Maintain BUY.
Heat exchanger companies with synergistic operations and assets. S&W Pte Ltd and S&W Process Equipment (Changshu) Pte Ltd manufacture and repair heat exchangers and pressure vessels. We see operational synergies with MCAST’s Top Great business (offshore oil & gas modules manufacturing) and its VacTech business, which services refinery equipment that incorporate heat exchangers. Furthermore, MCAST’s Chinese facility allows the group to tap into the low cost Chinese labour force as well as to participate in China’s vibrant oil & gas fabrication industry.
Good price with profit warranty with clawback provisions. The acquisition price is SGD5.1m, just under S&W’s book value of SGD5.2m. The consideration will be paid in three tranches, with about a 70%/30% cash/shares split. S&W has given MCAST a profit warranty of at least SGD2m per year on average over the next three years, with the vendors enjoying additional upside of 20% of profits in excess of SGD6m, balanced by a clawback provision of any earnings under this sum. Thus, the deal is priced at book value and at a maximum 2.6x P/E.
Raise estimates by 3%/7%. We understand that MCAST will be able to reduce operating costs (partly through changing the foreign labour mix) and finance costs at S&W, thereby improving profitability. We raise our forecasts for MCAST by 3%/7% for FY14F/15F and expect a step-up in earnings contributions from these acquisitions over the next three years.
Maintain BUY with SGD0.75 TP. With this acquisition, MCAST takes a significant step towards its 2020 goal of delivering SGD50m at the bottomline. Our TP is adjusted to SGD0.75 (from SGD0.74), based on 11x FY14F P/E.
Publish date: 06/02/14