Mencast -- which makes, supplies and repairs propellers and stern gear for seafaring vessels -- is purchasing Top Great for $24 million. Mencast will pay $9.6 million in cash and satisfy the remaining $14.4 million through an allotment of new Mencast shares via three separate tranches -- “a small price to pay for an accretive deal”, according to Gary Ng of CIMB.
That’s because the acquisition comes with a guarantee that Top Great will achieve net profits of not less than $8 million between May 1, 2011 and April 31, 2013. It Top Great fails to meet the target, it'll have to make good the shortfall in cash to Mencast within six months after the agreed period.
For the year ended Dec 31, 2010, income earned by Top Great before deducting taxes was $4.7 million. In comparison, Mencast achieved a net profit of $8.5 million over the same period, a 20.8% y-o-y rise, on the back of $32 million in revenues, up 21.9% y-o-y.
Analysts say the addition of Top Great will give Mencast the opportunity to tap a larger pool of clients in the region and add margin value with a fuller range of maintenance, repair and overhaul (MRO) services to the booming offshore and marine industry.
“This [acquisition] would allow Mencast to create positive synergies, economies of scale and strengthen its value proposition to attract and retain new clientele,” Ng of CIMB points out. “We think that with Top Great being integrated into Mencast, the group would eventually make its foray into overseas markets, which would mean higher margins due to the higher premium the group charges for projects outside Singapore.”
Mencast started out three decades ago as provider of repairs and maintenance services of marine propellers for fishing and bumboats in Singapore. It eventually expanded its client base to include owners and operators of tugboats and ferries in 1993 and extended its capabilities to provide a full range of sterngear equipment and services for local and regional shipyards and ship owners in 2001. In 2008, Mencast, which operates a yard in Tuas, sought a listing on the Catalist.
Last year, in a bid to increase growth, Mencast announced that it would lease 16,200 sq m of land at the waterfront on Penjuru Road to build a manufacturing plant for stern gear equipment and centralise its manufacturing activities for better efficiencies. Mencast expects to complete construction of the plant -- which will be 3.5 times larger than all its existing plants combined -- by year-end. Despite slowing demand for commercial ships given an existing oversupply in the market, Mencast is confident of booking revenues from repeat MRO (Maintenance, repair and operations) contracts from ship owners and expects to see growth coming from the booming offshore sector. The company currently has an order book of about $8 million.
Since the start of the year, shares of Mencast are up by about 10%, closing on May 20 at an all-time high of 45 cents each. But there’s more good news. Ng of CIMB has upgraded his 12-month target price on the stock by 6% to 70 cents apiece despite dilution from the new shares, as the stock is still trading at a 15% discount to its larger peers. At current levels, it has a market capitalisation of just $76.6 million and trades at 8 times earnings.
“This stock is only at the growth stage and has not scaled the high wall of valuation,” Ng writes in a recent report. “[The shares] will climb, and a further re-rating will propel the stock with an upgrade to the Mainboard from its current board.”
Weekend Comment May 20: Top Great buy propels Mencast into spotlight
Friday, 20 May 2011
Friday, 20 May 2011
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