Mencast Holdings

UOBKayhian on 9 May 2012

What’s New
· Maintain HOLD and target price of S$0.63. We recommend entry price at S$0.525 for a 20% upside.
· Proposed acquisition. Mencast Holdings (Mencast) has entered into a sale and purchase agreement to acquire 70.0% of the entire capital of Vac-Tech. Vac-Tech is principally engaged in the provision of industrial services to the refining and petrochemical industry, such as hydro jetting, tank desludging, heat exchanger and air fin cooler cleaning, decontamination and pipeline cleaning.
· S$8.4m price tag. The purchase consideration will be S$8.4m, of which S$5.0m will be satisfied in cash and the balance of S$3.4m will be satisfied by the allotment and issuance of new Mencast shares via two payment tranches. The issue price for the shares will be based on the weighted average price of the shares for ten business days after the date of completion of the acquisition, or S$0.55, whichever is higher, subject to a maximum issue price of S$0.65.
· Profit warranty. The vendors have warranted that the aggregate net profit after tax of Vac-Tech for the period from 1 Jan 12 to 31 Dec 13 shall be a minimum of S$5.0m. In the event that Vac-Tech fails to achieve such a target, the vendors shall make up for the shortfall in cash.
· First right of refusal to acquire remaining stake. Mencast will also have the first right of refusal to purchase the remaining 30.0% stake in Vac-Tech for a period of two years.

Stock Impact
· Rationale for acquisition. The acquisition of Vac-Tech is in line with Mencast’s strategy to grow its environmental services business. The acquisition is expected to create positive synergies with its existing marine and offshore maintenance, repair and overhaul (MRO) business and strengthen Mencast’s value proposition to attract and retain new clientele.

Earnings Revision
· Raised forecast. We raised our 2012 and 2013 net profit forecast by 5.2% and 9.4% respectively, accounting for contribution from Mencast’s 70% stake in Vac-Tech.
· EPS accretive acquisition. We factored in an increase of 6.2m new shares arising from the new acquisition. We have also raised our 2012 and 2013 EPS estimate by 3.1% and 5.6% respectively.

Valuation
· Maintain HOLD and target price of S$0.63 (unchanged). We value Mencast at 9.6x 2012F PE (fully diluted), at a 25% premium to Singapore-listed offshore peers’ average of 7.7x, due to its market leadership in specific niche offshore products and services. Our target price remains unchanged despite an upward revision of our EPS estimates due to a decline in peers’ 2012 average PE. We recommend entry price at S$0.525 for a 20% upside.