Mencast Holdings

UOBKayhian on 11 Apr

What’s New
· Maintain HOLD and target price of S$0.63. We recommend entry price at S$0.525 for a 20% upside.
· Green energy venture. Mencast Holdings (Mencast) has agreed on a joint venture (JV) with MIS Investment Pte Ltd (MIS) to embark on green energy business initiatives which include: a) oil recovery and sludge processing, b) water treatment, and c) bio mass and heat transfer projects.
· A 70% majority stake. Mencast will invest S$840,000 for a 70% majority stake in the JV while MIS will invest S$360,000 for a 30% stake. MIS is a private investment company owned by Mencast’s Executive Chairman and Chief Executive Officer, Mr Sim Soon Ngee Glenndle (80%) and his sister Sim Wei Wei (20%), who is also Mencast’s Administration and Human Resource Manager.

Stock Impact
· Environmental engineering and equipment. In our view, the JV will focus on providing engineering services and equipment manufacturing mainly for oil recovery and sludge processing.
· Oil recovery and sludge processing. Sludge is a semi-solid residue containing crude oil which is a by-product of oil production, refining and other industrial activities. Oil recovery and sludge processing involves the safe removal of waste sludge in line with environmental regulations, as well as the recovery of refinery re-usable oil from the waste sludge. We believe oil refineries and fuel tank farms could be potential customers for these services.
· Treating refinery waste. Oil refineries produce heavy crude oil sludge as a waste material, which is typically stored in large pits or incinerated. Sludge treatment equipment allows the hydrocarbons to be extracted from the waste material and fed back into the refinery system, resulting in cost savings for the refinery. We believe the JV could tap on the three Singapore refineries as potential customers for these services.
· Cleaning of fuel tanks. Fuel tank farms are large cylindrical structures used for the storage of crude oil or products. Prolonged storage of oil will cause sludge to form at the base of the tank, resulting in reduced capacity and requiring regular maintenance to keep the tanks in top condition. Singapore, being a major oil trading hub, has a large number of tank farms, and we believe potential customers for tank cleaning services could include Koninklijke Vopak (VPK NA) and Oiltanking Partners (OILT US).
· Environmental services peers. We have identified one listed peer – Canadian Oil Recovery & Remediation Enterprises (CVR CN), which provides sludge treatment, oil recovery and tank cleaning services. Privately held comparables include KMT International, Oreco, Pesco-Beam, Submech and Singapore-based Eco Group.
· Possible further capital injections. In our view, the S$1.2m seed capital may be insufficient to develop the business fully and Mencast may need to make further investments into the JV.
· Acquisition-led growth. We also believe Mencast could utilise the initial seed capital to acquire companies with existing capabilities in these green technologies.

Earnings Revision
· JV unlikely to provide near-term earnings boost. We have yet to factor in contribution from the JV pending further details. However, the group is still in the early stages of developing its green product portfolio and we believe the JV is unlikely to make any profit contribution in 2012.
· Raise our forecasts. We increase our 2012 revenue and EPS forecasts by 8.5% and 1.6% respectively to reflect stronger-than-expected offshore fabrication order wins. However, we reduce our 2012 net margin projection from 20.1% to 18.8% due to higher contributions from lower-margin offshore fabrication
·  Earnings drivers. We forecast Mencast’s current orderbook at S$24.0m, vs S$19.1m as of 31 Dec 11. Earnings growth in 2012 will be driven by: a) full-year contribution from new acquisitions Top Great and Unidive, b) jack-up component orders from Keppel Corp, and c) ramp-up in orders from Becker Marine for the Mewis Duct.

Valuation
· Maintain HOLD and target price of S$0.63. We value Mencast at 9.9x 2012F PE (fully diluted), a 25% premium to Singapore-listed offshore peers’ average of 7.9x, due to its market leadership in specific niche offshore products and services. We recommend entry price at S$0.525 for a 20% upside.