Eversendai Corporation Acquisition of Technics Oil & Gas Ltd

Eversendai announced that the group had acquired 24m shares (11.2%) in Technics Oil & Gas Ltd (“Technics”), an oil and gas based company listed in the Singapore Exchange for a total purchase consideration of RM62.1m. We are not surprised with the acquisition as the management had guided that it had been actively looking to invest in the oil and gas industry via acquisitions since early 2012. The rationale of the acquisition is to bring in the synergies and to complement between the oil and gas business and its existing steel structure business. We have raised our FY13 earnings estimates marginally by 0.6% as we imputed in the potential dividend contribution from Technics. Hence, our Target Price has been raised slightly from RM1.43 to RM1.44 based on an unchanged 8x PER FY13. We are keeping our MARKET PERFORM recommendation unchanged at this juncture as the contribution from this investment is negligible c. 3% of FY13E net profit.

Technics Oil & Gas Ltd. Technics currently operates three waterfront yards, which are located in Singapore, Indonesia’s Batam and Vietnam. It specialises in the design and fabrication of complex and highly customised process modules and equipment, including gas compression packages, which are integrated to form the operating system for production operations and storage applications in both onshore and offshore oil and gas exploration and production activities. Technics net profit recorded a 4-year compounded annual growth rate (CAGR) of 51.9% from SGD3.8m (RM9.8m) to SGD20.2m (RM52.2m), underpinned by the buoyant oil and gas sector and lucrative contracts secured from oil majors like Keppel Fels, Chevron, Petronas, Emerson, Siemens, PetroChina and Worley Parsons.

Creating synergies. We are positive on Eversendai’s investment in Technics as it will be a strong footing to venture into the oil and gas industry, leveraging on Technics’ established track record in the Oil & Gas sector, especially in international waters. Technics has the expertise in the compression systems and process modules, which will complement Eversendai’s structural steel design engineering and construction capabilities.

Purchase consideration is fair… Based on Technics’ FY12 financials and purchase price of RM62m, the acquisition price implied a 10.6x PER, which is in line with the small to mid-cap oil and gas trading multiples in the range of 12.0x. We see that Eversendai will be able to finance the acquisition as its cash coffers stood at c. RM198m with a net gearing of 0.04x (as of 3Q12).

Dividend contribution to Eversendai. Post-acquisition, assuming a 70% dividend payout ratio (in line with Technics’ historical dividend payout trend) and the consensus’ FY13 earnings estimates of RM21.3m, we believe that Eversendai will be able to get a contribution to its earnings of RM3m to RM4m a year. We do not discount the possibility that Eversendai will increase its shareholdings in Technics in the future to an associate level.

Market Perform recommendation is maintained. There is no change in our MARKET PERFORM recommendation as the contribution from the acquisition is negligible at this juncture. We have factored in the potential dividend contribution from Technics in our FY13 earnings estimate and hence our Target Price has been raised slightly from RM1.43 to RM1.44 (+0.7%).

Source: Kenanga