Mencast Holdings

UOBKayhian on 5 Mar 2012

What’s New

• Maintain BUY, with target price of S$0.70 (previously S$0.71), representing 16.7% upside from the current price.
• Net profit below expectation. Mencast Holdings (Mencast) reported a 2011 net profit of S$10.2m, up 20.5% yoy. However, net profit was 20.0% below our forecast mainly due to: a) a one-off third-party claim against a subsidiary, b) higher rental expenses attributable to the group’s additional plot of land in Penjuru Road, and c) higher-than-expected administrative costs arising from newly-acquired Top Great and Unidive.
• Revenue up 75.9% yoy. Mencast reported 2011 revenue of S$56.3m, up 75.9% yoy. The increase was mainly due to the maiden revenue contribution of approximately S$29.2m from newly-acquired subsidiaries Top Great and Unidive.
• Dip in gross margin was expected. Gross profit margin fell from 49.8% in 2010 to 41.6% in 2011, in line with expectations. This was due to competitive pricing in the marine services segment, offset by the maiden contribution from the higher margin offshore & engineering services segment.

Stock Impact

• Unveils fresh corporate identity. Following the recent acquisitions of Top Great and Unidive, Mencast has rolled out a new corporate identity incorporating the group’s new business segments and reflecting its transformation into a full-fledged maintenance, repair and overhaul (MRO) services provider. Mencast has introduced a new corporate logo to dissociate itself from the traditional propeller business and a corporate tagline – “Partner Perfect”, highlighting its emphasis on service excellence.
• Diversifying into offshore manufacturing and services. Mencast aims to penetrate the offshore manufacturing and services business with the group’s newly-acquired expertise in servicing thrusters for floating units, assessing the integrity of offshore structures as well as manufacturing topside components such as booster pumps. In the near future, the group aims to clinch new service agreements with major rig operators and owners.
• Expanding capacity. Mencast plans to expand its manufacturing and services capacity by developing an extended site at 42E Penjuru Road, beside the group’s existing waterfront facility. The site is scheduled to be completed in one year and will increase total built-up area by 23.4%.

Earnings Revision

• Reduce 2012 forecast. We reduce our 2012 net profit by 12.8%, accounting for higher-than-expected administrative expenses arising from the acquisition of Top Great and Unidive.

Valuation/Recommendation

• Maintain BUY, with target price of S$0.70 (previously S$0.71), representing a 16.7% upside from the current price. Our target price is pegged to 9.7x 2012F PE, in line with peers’ average. We note that despite our reduced 2012F EPS estimate, our target price remains largely unchanged due to a recent revaluation of its peers.