Mencast Holdings

[Nick]

I think so too MW though I was hoping for a slightly higher dividend haha. Cash will be needed for Penjuru expansion and hopefully a synergistic acquisition in the region for it to spread it wings. I think it will be difficult for it to replicate its double digit growth figures this year without any acquisition. 2012 should be a bumper year when the new facility is operational.

Have you factored in the start-up costs relating to the new facility and the associated depreciation on the building and macinery? If so, then FY 2012 may not be "bumper" in the strict sense of the word. This is similar to MTQ's Bahrain expansion where the initial one year would see high start up costs and staff training costs and hence would incur a loss.

Speaking of which, the new Penjuru expansion seems to be indicate organic growth of Mencast's business. I also noted that their growth has been driven by M&A (Refcon). So, in your view, how much do you think future growth will be attributable to organic, and how much of it will be acquisitive? Problem I have with acquisitive is that more funds may be needed - so fund raising and higher leverage could be an issue.

Thanks!

(Not vested)

The Penjuru facility will be operational at the end of 2011. So yes, it is highly possible that they may face start up expenses in the 1H 2012. Being a manufacturing plant, the key question is whether will they be successful in attracting manufacturing orders from large vessels ? If they do, combined with their pricing power, they might be able to post a profit and steadily grow it in the coming years. If they fail to garner sufficient level of contracts, this manufacturing plant will be one expensive flop. Again all guess-work here since Mencast hasn't done anything like this before.

Based on the SGX Acquisition announcement (dated 30 June 2009), Mencast mentioned that the 2 entities generated $1.1 million profit for FY 2008. Since the acquisition was completed in 2H 2009, the company has seen its profit grown from $5.8 million in FY 2008 to $8.5 million in FY 2010. This shows that the initial contribution from Recon alone wasn't the only growth driver. Clearly, Mencast has succeeded in growing both its own and newly acquired segment and this has translated to huge growth in earnings over the past 2 years. But again, Mencast doesn't provide much break-down of its earnings, so I can't make any meaningful comments beyond this.

I identified 3 possible organic growth factors -

i) Increasing the variety of products manufactured through its partnership with Becker.

ii) Expanding out of Singapore and Indonesia by following the local ship yard builders. Alternatively, form JV with foreign shipyard owners. Not easy.

iii) Service segment should continue to benefit from growing fleet size.

[Musicwhiz]

Thanks for your points, Nick. Nice to learn more about the business. Keep up the sharing.

[Nick]

Mencast uploaded their FY presentation slides on their website - http://mencast.listedcompany.com/misc/ME...mat%29.pdf

Quite a fair bit of pictures of their products and the new water-front facility. Interestingly, they have expanded their scope in the Sterngear Service division by entering into a Fleet Maintenance Program. At the moment, they have 3 clients in the FMP division - PSA Marine, Swissco Offshore and Ajang Shipping. They also expanded their manufacturing capability by offering Mewis Duct products.

The Management looks bullish about their prospects but I must caution that despite the stellar profitability record, Mencast is a very small company dealing in a highly volatile environment. I guess a good indication of a recovery in their manufacturing division would be an increase in their reported order-book in 1H 2011 financial statements. Currently, it stands at $8 million.

(Vested)

[Nick]

An unexpected write up from Kim Eng. Very short report though with little analysis. The latest presentation slides (link in the previous post) should be read in tandem if you seek to learn more about this catalist company.

http://www.remisiers.org/cms_images/ssu18032011ke.pdf

(Vested)

[Musicwhiz]

Business Times - 25 Apr 2011

Mencast propels itself into the big leagues

2010 was a record year with a 21% increase in net profit

By JOYCE HOOI

IN A year where megaships and towering oil rigs have hogged the headlines, it has been easy to overlook the less-sexy elements of the offshore and maritime industry toiling beneath the water's surface.

Mencast Holdings - which manufactures propellers and rudders for the workhorses of the sea such as tugboats and ferries - is convinced, however, that its time in the sun has come.

The firm, which has been listed on the Catalist for almost three years, posted a record year in 2010, with a 22 per cent growth in revenue to $32 million and a 21 per cent increase in net profit to $8.5 million.

Gross margins stand at a fat 49.8 per cent while the net profit margin is 26.5 per cent, boosted by a canny shift towards the more lucrative services part of the business.

'When we expanded our revenue, the margins remained very robust,' its chief executive officer, Glenndle Sim, pointed out last month.

It has been a sad few days for Mr Sim, whose father - Sim Gok Hian - passed away two weeks ago. The elder Mr Sim founded Mencast and had stayed on as senior adviser after his son was appointed CEO and executive chairman in 2009, before relinquishing his senior adviser post last year for health reasons.

Even with the pall cast by the elder Mr Sim's passing, the future for Mencast is looking good, as the firm's expansion plans are near completion.

By the end of this year, its new waterfront property at Penjuru Road, which is 3.5 times bigger than its existing plants combined, will be ready. Over the next two years, the firm is set to occupy 40,000 square metres of space, up from 10,000 sq m at the new site for which $7.9 million has been set aside so far.

Beyond the question of space, the waterfront promises a crucial utility. 'With the waterfront, we can have our own boats going out offshore to collect the items from the big ships and we can service them. Before that, we had to go through somebody who had waterfront,' Mr Sim told BT.

If Mr Sim's ambitions are anything to go by, he is going to need every inch of that waterfront.

An alliance with Becker Marine Systems this year as the German firm's sterngear equipment manufacturer will see Mencast gaining a foothold in the Chinese, South Korean and Japanese markets, where the bigger ships are.

'It will quantum-leap Mencast's revenue . . . Becker controls 70 per cent of the steering systems in the world. We can do propellers, they can do rudders, and package it for the Chinese market,' said Mr Sim.

Where the earnings for 2011 are concerned, Mr Sim said that the alliance will have 'definitely some impact'.

The future, however, lies more in fixing a propeller than in forging a new one. Mencast's acquisition of Recon Propeller and Engineering in 2009 speaks of its gradual move towards the services aspect of its business.

Last year, hampered by a slowdown in vessel newbuilds because of the oversupply situation, Mencast's manufacturing revenue fell, but its services revenue enjoyed a robust surge. Over time, the revenue mix will be skewed in favour of the services segment.

'Moving forward, we're pitching ourselves as a marine maintenance, repair and overhaul firm,' said Mr Sim.

(Not Vested)

[Nick]

Business Times - 25 Apr 2011

Mencast propels itself into the big leagues

2010 was a record year with a 21% increase in net profit

By JOYCE HOOI

IN A year where megaships and towering oil rigs have hogged the headlines, it has been easy to overlook the less-sexy elements of the offshore and maritime industry toiling beneath the water's surface.

Mencast Holdings - which manufactures propellers and rudders for the workhorses of the sea such as tugboats and ferries - is convinced, however, that its time in the sun has come.

The firm, which has been listed on the Catalist for almost three years, posted a record year in 2010, with a 22 per cent growth in revenue to $32 million and a 21 per cent increase in net profit to $8.5 million.

Gross margins stand at a fat 49.8 per cent while the net profit margin is 26.5 per cent, boosted by a canny shift towards the more lucrative services part of the business.

'When we expanded our revenue, the margins remained very robust,' its chief executive officer, Glenndle Sim, pointed out last month.

It has been a sad few days for Mr Sim, whose father - Sim Gok Hian - passed away two weeks ago. The elder Mr Sim founded Mencast and had stayed on as senior adviser after his son was appointed CEO and executive chairman in 2009, before relinquishing his senior adviser post last year for health reasons.

Even with the pall cast by the elder Mr Sim's passing, the future for Mencast is looking good, as the firm's expansion plans are near completion.

By the end of this year, its new waterfront property at Penjuru Road, which is 3.5 times bigger than its existing plants combined, will be ready. Over the next two years, the firm is set to occupy 40,000 square metres of space, up from 10,000 sq m at the new site for which $7.9 million has been set aside so far.

Beyond the question of space, the waterfront promises a crucial utility. 'With the waterfront, we can have our own boats going out offshore to collect the items from the big ships and we can service them. Before that, we had to go through somebody who had waterfront,' Mr Sim told BT.

If Mr Sim's ambitions are anything to go by, he is going to need every inch of that waterfront.

An alliance with Becker Marine Systems this year as the German firm's sterngear equipment manufacturer will see Mencast gaining a foothold in the Chinese, South Korean and Japanese markets, where the bigger ships are.

'It will quantum-leap Mencast's revenue . . . Becker controls 70 per cent of the steering systems in the world. We can do propellers, they can do rudders, and package it for the Chinese market,' said Mr Sim.

Where the earnings for 2011 are concerned, Mr Sim said that the alliance will have 'definitely some impact'.

The future, however, lies more in fixing a propeller than in forging a new one. Mencast's acquisition of Recon Propeller and Engineering in 2009 speaks of its gradual move towards the services aspect of its business.

Last year, hampered by a slowdown in vessel newbuilds because of the oversupply situation, Mencast's manufacturing revenue fell, but its services revenue enjoyed a robust surge. Over time, the revenue mix will be skewed in favour of the services segment.

'Moving forward, we're pitching ourselves as a marine maintenance, repair and overhaul firm,' said Mr Sim.

(Not Vested)

Mencast share price has had a mini rally this month. It XD'ed today.

Good to see some volume creeping in haha !

(Vested)

[Nick]

http://nextinsight.net/index.php/story-a...ts-now-say - summary of CIMB latest report which raised Mencast TP to $0.66

(Vested)

[Musicwhiz]

Hi Nick and all,

Any comments on Mencast's latest acquisition?

http://info.sgx.com/webcoranncatth.nsf/V...4001AF3E9/$file/Acquisition_of_Top_Great.pdf?openelement

Unaudited net profit was $4.7 million for FY 2010 for Top Great. NAV was $10.64 million. Mencast is paying $24 million for the Company. This is about 5.1x historical PER and about 2.25x book value.

Potential issuance of 35 million shares @ 41 cents to satisfy remainder of purchase consideration of $14.4 million ($9.6 million by cash). Dilution will be about 22% for existing shareholders.

(Not Vested)

[Nick]

THE PROPOSED ACQUISITION OF THE ENTIRE ISSUED AND PAID-UP SHARE CAPITAL OF TOP GREAT ENGINEERING & MARINE PTE LTD ( “TOP GREAT”)

Top Great Info

Top Great, together with its subsidiaries (the “Top Great Group”), is principally engaged in the business of engineering design, procurement, fabrication and installation of structural and precision engineering systems and plants. Its business operations include the provision of skilled professionals and manpower as well as full turnkey project management of engineering projects. The latter encompasses every stage from project
inception to material procurement, completion and handover.

The Top Great Group serves a large group of customers in the environment, marine and oil & gas sectors from many countries, some of which include Singapore, Malaysia, Indonesia and the Middle East.

http://info.sgx.com/webcoranncatth.nsf/V...4001AF3E9/$file/Acquisition_of_Top_Great.pdf?openelement

Deal Structure

Mencast has proposed to acquire the Top Great Group for $24 million which will be satisfied in 3 tranches:

1st Tranche (within 20 business days): $6.0 mil cash + $7.2 mil worth of New Shares

2nd Tranche (12 months time): $1.8 mil cash + $3.6 mil worth of New Shares

3rd Tranche (24 months time): $1.8 mil cash + $3.6 mil worth of New Shares

In total, $9.6 million cash and $14.4 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 $8.0 million for the 24 months period (til Apr 2013). In other words, the acquisition should generate a minimum of $4.0 million NPAT annually which compares well with Mencast FY 10 earnings of $8.49 million.

Vendor Partnership with Mencast

A 3 year service agreement will also be rendered effective between the Mr Wong Boon Huat (the Vendor) upon completion of the acquisition and he will be appointed on Mencast Board as a Director in connection with the latest acquisition. I think this is a good move as I personally feel that the old Management would have decades worth of connection with clients and employees and would understand the business far better than an outsider. The 1 year lock up of new shares, appointment into Mencast board and service agreement would point that the Vendor is here to stay and will continue to contribute to the Group.

Valuation

This acquisition is worth 1/3 of Mencast current market capitalization so it is truly a big milestone in its history. I wish to examine the deal valuation:

FY 2010 NPAT: $4.38 million
NAV: $10.64 million
Mencast Valuation: $24.0 million
ROE (based on Mencast Valuation): 18.25%
PER: 5.48

Since a profit warranty is in place, I would expect similar earnings going forward for the next few years. The acquisition will increase Mencast EPS from 5.39 SG cents to 6.68 SG cents (based on the SGX document). I think the valuation is fair and should be accretive.

Rationale

The Proposed Acquisition represents an opportunity for the Group to leverage on the established client base, industry reputation and accreditations developed by the Top Great Group over its three decades of operations, as well as increase its revenue base with a fuller range of Marine MRO services. This would allow the Group to create positive synergies, economies of scale and strengthen its value proposition to attract and retain new clientele. (Mencast)

Top Great has a corporate website - http://www.topgreat.com.sg/

I noticed that it has a 50,000 sqm water-front facility in Penjuru ( http://www.topgreat.com.sg/products/prod...=19&CateID= ) with 150m worth of water front length. Mencast is developing 35,000 sqm facility in Penjuru with 150m of water front length which will be ready at the end of the year. This might very well be the star attraction behind the deal ! Together, with the potential expansion of its clientele base and products, it might seem attractive to the Management.

Outlook

Notwithstanding the dilution of shares in the next 2 years, I would expect the NPAT generated from the latest acquisition 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 ship repair business, its huge Penjuru facility becoming operational at year end and the profit guarantee of $8 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 deal.

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.

(Vested)

[Musicwhiz]

Hi Nick,

Thanks for the summary and your thoughts.

A few curious questions from me, if I may:-

1) Does Mencast plan to borrow the amount of money ($9.6m) required for the cash component portion of the deal? I ask this because under gearing, Mencast envisages going into net debt from its current net cash position; but in the announcement itself it is mentioned that internal cash flows will be used. So the question is does the debt come from Top Great itself?

2) Mencast is simply adding up the profit from Top Great into their own Group profit to achieve the fully diluted EPS figure assuming transaction is completed. I would take this to be more of a forecast rather than concrete proof that the acquisition will really enable an increase in EPS as stated. Too many uncertainties regarding synergy between acquiror and acquiree. Also, I think ROE may be a more valid measure rather than EPS.

3) Goodwill from the transaction is noticeably high at $13.4 million. Why is't there any impairment or amortization of goodwill? Is this to be expected in the near term and how will it impact earnings?

The positives of the deal are the Penjuru land and also the 3-year vendor partnership + profit warranty. Mencast managed to negotiate a pretty good deal IMHO.

(Not Vested)