Mencast Holdings

UOBKayhian on 7 Aug 2012

Results
· Earnings slightly below par. Mencast Holdings’ (Mencast) 1H12 net profit grew 27.7% yoy to S$6.9m, or 43% of our full-year profit forecast. This was marginally below our expectation due to lower-than-expected revenue and higher administrative costs.
· Revenue up 41.9%. 1H12 revenue increased 41.9% yoy to S$34.6m. Offshore & Engineering revenue, which contributes two-thirds of the group’s total revenue, grew 100.9% due to contribution from newly-acquired subsidiaries. However, Marine Services revenue declined 7.5% yoy due to a slowdown in shipping and ship-building.
· Higher admin costs. Administrative expenses for 1H12 rose 57% yoy to S$7.6m. This was due to additional recurring expenses arising from newly-acquired subsidiaries.

Stock Impact
· Cautious outlook. Management has turned cautious about the business outlook on the back of global uncertainties. Both the offshore and marine divisions are likely to face challenging environments as companies operating in the offshore segment hold back on capital spending, while weak shipping rates weigh on marine activity.
· A bright spot. On a positive note, Mencast will continue to benefit from the jack-up ordering boom as it manufactures and fabricates niche components used in jack-up rig construction. We expect Mencast to clinch 10 jack-up contracts over the next two years, worth S$16m and S$24m in 2012 and 2013 respectively.
· Potential beneficiary of the RAPID project. We believe that Mencast could potentially clinch maintenance contracts to service the Petronas Refinery and Petrochemical Integrated Development (RAPID) in Johor, Malaysia. The development is expected to draw investment of RM120b over the next five years, and will turn Johor into a regional hub for oil and gas (O&G) activities.

Earnings Revision
· Lowered forecast. We have lowered our 2012 and 2013 revenue by 15.1% and 5.7% respectively to account for lower-than-expected contract wins. As a result, we have also lowered our 2012 and 2013 net profit forecasts by 11.3% and 2.1% respectively.

Valuation
· Maintain HOLD and target price of S$0.62 (previously S$0.63), implying upside of 9.7%. We roll over our valuation basis to 2013, valuing Mencast at 8.4x fully diluted 2013F PE. Our target PE is at a 25% premium to Singapore-listed offshore peers’ average of 6.7x, due to Mencast’s market leadership in specific niche offshore products and services. We recommend entry price at S$0.52 for a 20% upside.