21-06-2011, 02:38 PM
THE PROPOSED ACQUISITION OF THE ENTIRE ISSUED AND PAID-UP SHARE CAPITAL OF UNIDIVE MARINE SERVICES PTE LTD (“UNIDIVEâ€)
Unidive Info
Unidive, together with its subsidiaries (including Unidive Malaysia) (the “Unidive Groupâ€), is principally engaged in the business of the provision of a full range of topside (rope access) and subsea (diving) services for the offshore and inshore marine industry, particularly in inspections, repairs and maintenance.
http://info.sgx.com/webcoranncatth.nsf/V...6001AFD44/$file/Acquisition_of_UNIDIVE.PDF?openelement [SGX Announcement]
Deal Structure
Mencast has proposed to acquire the Unidive Group for $14.85 million which will be satisfied in 4 tranches:
1st Tranche (Completion Date): $6.0 mil cash + $1.212 mil worth of New Shares
2nd Tranche (6 months after C.D): $1.0 mil cash
3rd Tranche (12 months after C.D): $1.712 mil cash + $1.212 mil worth of New Shares
4th Tranche (24 months after C.D): $3.712 mil cash
In total, $12.425 million cash and $2.425 million worth of New Shares will be issued to the Vendors.
Profit Warranty
Interestingly, a profit warranty comes attached with the acquisition. The Vendors have guaranteed NPAT of $6.6 million for the 24 months period (til May 2013). In other words, the acquisition should generate a minimum of $3.3 million NPAT annually which compares well with Mencast FY 10 earnings of $8.49 million (excluding the Top Great acquisition). The expected ROE will exceed 20%. A profit warranty is a shrewd move from the Management since it limits their liabilities in an event that the acquisition fails to perform. Moreover, it gives great incentive for the previous Management to work hard to ensure their Company do not falter.
Vendor Partnership with Mencast
A 3 year service agreement will also be rendered effective between the two Vendors upon completion of the acquisition. The newly issued shares have a 1 year lock up period as well. I like the idea of service agreements as it ensures continuity of the old Management in the Company which they had built up. This will ensure minimal disruption to the overall operation of the Company.
Valuation
This acquisition is worth 1/5 of Mencast current market capitalization. I wish to examine the deal valuation:
FY 2010 NPAT: $3.1 million
NAV: $6.78 million
Mencast Valuation: $14.85 million
ROE (based on Mencast Valuation): 20.8%
Since a profit warranty is in place, I would expect similar earnings going forward for the next few years. Currently, Mencast EPS stands at 5.39 cents for FY 2010 - after the Top Great acquisition, its EPS will increase to 6.68 cents and after the Unidive acquisition, its EPS will further increase to 7.91 cents (based on FY 2010 results). The information is available in the pro forma financial information in the SGX document. It would seem that the 2 acquisitions are EPS accretive and hopefully dividend accretive.
Rationale
The Proposed Unidive Acquisition provides the Group with a new earnings stream from the lucrative Inspections, Repairs & Maintenance business, which is a subset of the Group’s MMRO business. The Unidive Group’s inspection capabilities put it in an unique position to refer service and manufacturing opportunities to the Group and could become an invaluable proprietary channel to sell the Group’s products and services.
The Proposed Unidive Acquisition therefore represents an opportunity for the Group to expand the range of Marine MRO services that it provides and leverage on the good client base, industry reputation and accreditations that the Group has developed over the years. This will allow the Group to create positive synergies, economies of scale and strengthen its value proposition to attract and retain new customers.
Unidive Corporate Website - http://www.unidivemarine.com/
The website is very informative about the type of service the Company provides in the Marine MRO sector. There are also a list of clients which includes major shipyards like Keppel FELS, PPL Yard and Sembmarine, drilling companies like Maersk and Seadrill and government agencies like DSTA and the Police Coast Guard. This could possible expand Mencast clientele base and provide a new revenue steam in its rapidly growing MRO division. As earlier mentioned in the TG acquisition, I was initally confused about the change in the wording of Mencast description in its AR 2010 - it is starting to be clear now as its rapidly expands its scale and revenue stream in the MRO division. This could potentially off-set the slowdown in its traditional sterngear manufacturing division since the shipping over-supply doesn't look likely to end for another 5 years.
Outlook
Notwithstanding the dilution of shares in the next 2 years, I would expect the NPAT generated from the latest two acquisitions to boost Mencast FY profit and EPS this year. Mencast has successfully integrated its FY 09 acquisition of Recon Propellers giving rise to 2 years worth of record revenue and earnings. With the improving shipbuilding sentiments, continuing expansion of its MRO business (ship repair and fleet management), its huge Penjuru facility becoming operational at year end and the profit guarantee of $14.6 mil for the next 2 years, Mencast looks set for another round of record revenue and earnings in the next 3 years. The Management owns 57% stake in Mencast and will suffer dilution as a result of the two deal. The latest two acquisition should be completed in 2H 2011 and will contribute to earnings then. More crucially, the Group will have a net debt of $17.37 million post completion of the 2 acquisitions. This implies a net gearing of 30% which is decent since this is a rapidly growing Catalist company. But in turning to debt to finance the acquisition, there is little room for error since the Group will have to deal with high interest interest expense and loan repayments. If the companies do not perform as expected, this will be a huge cash drag. I guess things will be clearer in 2H 11 results.
FY 2010 Presentation Slides: http://mencast.listedcompany.com/misc/ME...mat%29.pdf
Risk
1) This is a sizeable acquisition. If it doesn't succeed, Mencast might be forced to impair the huge amount of goodwill harming the balance sheet. The drop in core NPAT will not offset the dilution of equity hence reducing the share price.
2) The Penjuru plant may incur start up losses in FY 12 dragging down the Group performance.
3) The Penjuru facility may not attract sufficient clients.
4) The core operations may not perform well in any future recessions.
5) Mencast will no longer be a 'net cash' coy so it is exposed to the volatile credit market and interest rates.
6) Mencast is ultimately a small catalist company and may not be able to raise sufficient capital in the event of a problem.
(Vested)
Unidive Info
Unidive, together with its subsidiaries (including Unidive Malaysia) (the “Unidive Groupâ€), is principally engaged in the business of the provision of a full range of topside (rope access) and subsea (diving) services for the offshore and inshore marine industry, particularly in inspections, repairs and maintenance.
http://info.sgx.com/webcoranncatth.nsf/V...6001AFD44/$file/Acquisition_of_UNIDIVE.PDF?openelement [SGX Announcement]
Deal Structure
Mencast has proposed to acquire the Unidive Group for $14.85 million which will be satisfied in 4 tranches:
1st Tranche (Completion Date): $6.0 mil cash + $1.212 mil worth of New Shares
2nd Tranche (6 months after C.D): $1.0 mil cash
3rd Tranche (12 months after C.D): $1.712 mil cash + $1.212 mil worth of New Shares
4th Tranche (24 months after C.D): $3.712 mil cash
In total, $12.425 million cash and $2.425 million worth of New Shares will be issued to the Vendors.
Profit Warranty
Interestingly, a profit warranty comes attached with the acquisition. The Vendors have guaranteed NPAT of $6.6 million for the 24 months period (til May 2013). In other words, the acquisition should generate a minimum of $3.3 million NPAT annually which compares well with Mencast FY 10 earnings of $8.49 million (excluding the Top Great acquisition). The expected ROE will exceed 20%. A profit warranty is a shrewd move from the Management since it limits their liabilities in an event that the acquisition fails to perform. Moreover, it gives great incentive for the previous Management to work hard to ensure their Company do not falter.
Vendor Partnership with Mencast
A 3 year service agreement will also be rendered effective between the two Vendors upon completion of the acquisition. The newly issued shares have a 1 year lock up period as well. I like the idea of service agreements as it ensures continuity of the old Management in the Company which they had built up. This will ensure minimal disruption to the overall operation of the Company.
Valuation
This acquisition is worth 1/5 of Mencast current market capitalization. I wish to examine the deal valuation:
FY 2010 NPAT: $3.1 million
NAV: $6.78 million
Mencast Valuation: $14.85 million
ROE (based on Mencast Valuation): 20.8%
Since a profit warranty is in place, I would expect similar earnings going forward for the next few years. Currently, Mencast EPS stands at 5.39 cents for FY 2010 - after the Top Great acquisition, its EPS will increase to 6.68 cents and after the Unidive acquisition, its EPS will further increase to 7.91 cents (based on FY 2010 results). The information is available in the pro forma financial information in the SGX document. It would seem that the 2 acquisitions are EPS accretive and hopefully dividend accretive.
Rationale
The Proposed Unidive Acquisition provides the Group with a new earnings stream from the lucrative Inspections, Repairs & Maintenance business, which is a subset of the Group’s MMRO business. The Unidive Group’s inspection capabilities put it in an unique position to refer service and manufacturing opportunities to the Group and could become an invaluable proprietary channel to sell the Group’s products and services.
The Proposed Unidive Acquisition therefore represents an opportunity for the Group to expand the range of Marine MRO services that it provides and leverage on the good client base, industry reputation and accreditations that the Group has developed over the years. This will allow the Group to create positive synergies, economies of scale and strengthen its value proposition to attract and retain new customers.
Unidive Corporate Website - http://www.unidivemarine.com/
The website is very informative about the type of service the Company provides in the Marine MRO sector. There are also a list of clients which includes major shipyards like Keppel FELS, PPL Yard and Sembmarine, drilling companies like Maersk and Seadrill and government agencies like DSTA and the Police Coast Guard. This could possible expand Mencast clientele base and provide a new revenue steam in its rapidly growing MRO division. As earlier mentioned in the TG acquisition, I was initally confused about the change in the wording of Mencast description in its AR 2010 - it is starting to be clear now as its rapidly expands its scale and revenue stream in the MRO division. This could potentially off-set the slowdown in its traditional sterngear manufacturing division since the shipping over-supply doesn't look likely to end for another 5 years.
Outlook
Notwithstanding the dilution of shares in the next 2 years, I would expect the NPAT generated from the latest two acquisitions to boost Mencast FY profit and EPS this year. Mencast has successfully integrated its FY 09 acquisition of Recon Propellers giving rise to 2 years worth of record revenue and earnings. With the improving shipbuilding sentiments, continuing expansion of its MRO business (ship repair and fleet management), its huge Penjuru facility becoming operational at year end and the profit guarantee of $14.6 mil for the next 2 years, Mencast looks set for another round of record revenue and earnings in the next 3 years. The Management owns 57% stake in Mencast and will suffer dilution as a result of the two deal. The latest two acquisition should be completed in 2H 2011 and will contribute to earnings then. More crucially, the Group will have a net debt of $17.37 million post completion of the 2 acquisitions. This implies a net gearing of 30% which is decent since this is a rapidly growing Catalist company. But in turning to debt to finance the acquisition, there is little room for error since the Group will have to deal with high interest interest expense and loan repayments. If the companies do not perform as expected, this will be a huge cash drag. I guess things will be clearer in 2H 11 results.
FY 2010 Presentation Slides: http://mencast.listedcompany.com/misc/ME...mat%29.pdf
Risk
1) This is a sizeable acquisition. If it doesn't succeed, Mencast might be forced to impair the huge amount of goodwill harming the balance sheet. The drop in core NPAT will not offset the dilution of equity hence reducing the share price.
2) The Penjuru plant may incur start up losses in FY 12 dragging down the Group performance.
3) The Penjuru facility may not attract sufficient clients.
4) The core operations may not perform well in any future recessions.
5) Mencast will no longer be a 'net cash' coy so it is exposed to the volatile credit market and interest rates.
6) Mencast is ultimately a small catalist company and may not be able to raise sufficient capital in the event of a problem.
(Vested)