MEMSTAR TECHNOLOGY

UOBKayhian on 14 Jan 2014

VALUATION

• Memstar is trading at 24.7x FY13 PE, comparable to its regional peers of 26.3x.

INVESTMENT HIGHLIGHTS

• With state-of-the-art technology, Memstar is one of the few manufacturers of highperformance PVDF hollow fibre membranes in the world. Its product offerings are used in water, food, pharmaceutical and other separation processes. It has recently entered into an agreement with United Envirotech (UEL) to dispose of its principal business, Memstar Pte Ltd.
• Details of the proposed disposal. Memstar Pte Ltd will be sold for S$293.4m to be satisfied through S$73.4m (25%) in cash and the remaining 75% via the issuance of 200.06m new UEL shares. At UEL’s current price at S$0.995, the transaction values Memstar at S$0.103/share, or 23.9x FY13 PE, in line with regional peers’ 25.2x. 
• What shareholders will have after the deal. Shareholders are expected to receive 75.3 UEL shares for every 1000 shares that they owned in Memstar (Based on 200.06m UEL shares received/2,655.8m Memstar shares outstanding). Following the transaction, Memstar will become a shell company with cash holdings of S$73.4m or S$0.0276/share. (cash portion from the proceeds of the disposal) 
• What’s next? With a healthy cash war chest of S$73m after the proposed disposal, management intends to maintain the listed status of Memstar. Given the recent valuation re-rating in the water industry, we do not dismiss the possibility of an injection of assets into Memstar further down the road. UEL currently holds a 13.2% stake in Memstar. 
• Synergies between UEL and Memstar. UEL has been a major customer of Memstar, contributing to more than 50% of its sales for the past few years. With the acquisition of Memstar, UEL is expected to enjoy margin expansion and become a vertically integrated water solutions provider. 
• Water to riches. UEL builds and operates waste water treatment plants. Riding on the water industry boom in China, net profit for UEL grew at a 5-year CAGR of 29.3% from S$8.5m in FY08 to S$31.0m in FY13. Water treatment EBIT, which made up 35.9% of UEL’s FY13 EBIT, has also grown at a CAGR of 31.6% from S$4.4m in FY08 to S$17.4m in FY13. Together with Memstar’s waste water treatment plants, UEL will have a treatment capacity of about 1,400,000m3/ day.
• Undemanding valuation. Upon consolidation of Memstar, UEL’s FY13 EPS would have been 5.21 S cents (based on SGX announcement), or an implied FY13 PE of 18.6x, undemanding vs regional peers’ 25.2x FY13 PE.