Cuscapi - En route to Philippines!

News   Cuscapi Phillippines, a subsidiary of the company,  has proposed to acquire 100% of Tills N Labels System Marketing (“TNL”) from several individual sellers (vendor) for an aggregate value of RM6.4m. 

 The purchase consideration was arrived at on a “willing buyer willing seller” basis. 

 The vendor will maintain a net tangible asset (“NTA”) of at least RM1.2m based on the balance sheet of TNL as at end-June 2012. 

 The vendor also has the obligation to fulfil a profit guarantee of RM1.2m net of taxes within one (1) year from the agreement execution or from FY12. 

 Any shortfall of the profit guarantee by the vendor will be recoverable by Cuscapi by five times up to a maximum of RM1.5m.

  

Comments   We are positive on the news as TNL has been Cuscapi’s exclusive distributor in Philippines all these while and this acquisition could lend it further support in targeting another potential new contract from one of the biggest fast-food restaurant chains in Philippines (see Outlook below). 

 Nonetheless, we reckon the pricing is on the high side as Cuscapi is buying at an effective Forward P/NTA of 2.2x for TNL, which is at a 46% premium to Cuscapi’s proforma P/NTA valuation of 1.5x.

 The company, however, should have no issues with the payment as it will still be in a net cash position  of RM7.9m after the acquisition. 

 However, the reduction its cash position from RM14.3m to RM7.9m will potentially cut its interest income by half or about RM84k per annum. Nonetheless, the impact would only be marginal, say 0.8%, to our FY12E earnings estimate of RM10.1m.

  

Outlook  We believe Cuscapi will continue to strengthen the contributions from its overseas units, which have improved from just 19% of the group’s revenue in 1Q11 to 38% in 1Q12.

 We still expect Cuscapi to conclude a project with one of the biggest fast-food restaurant chains in Philippines this year, although this has been delayed since our initiation coverage in Aug 2011. 

 New products in the pipeline are also expected to be launched in 2H12.

  

Forecast  We are maintaining our earnings estimates at this juncture, pending further clarifications with the management in regard to the potential contribution from TNL over the next few years.

  

Rating Maintain MARKET PERFORM.

  

Valuation   Our unchanged target price of RM0.36 is based on a targeted PER of 8.6x on FY12 EPS of 4.1sen.

  

Risks  Delay in its projects implementation.

Source: Kenanga