XMH announced it has acquired Mech-Power Generator (MPG), a 30-year-old manufacturer of diesel-powered generator sets.
The deal is strongly EPS-accretive, reduces business risk through diversification into adjacent sectors and immediately removes constraints on XMH’s growth.
Full-year MPG profits are about 34% of XMH’s. In FY14F/15F, we expect MPG to contribute SGD2.4m/5.1m to XMH’s core SGD14.4/15.0m (half-year contribution in FY14F).
MPG’s margins are trending up due to high-value, higher-margin contracts recently signed with more on the horizon. This deal will allow XMH (operating now at full capacity) to immediately expand its operations via MPG’s Iskandar
plant, bypassing workspace and foreign-worker constraints in Singapore. MPG will benefit from XMH’s strong balance sheet and access to financing to further grow its operations.
Following this deal, XMH is still net-cash and remains on the warpath for more acquisitions.
We raise FY14F/15F estimates by 10%/25% as MPG’s profitability well exceeds our prior acquisition assumptions. Our new assumptions include SGD0.5m/1.0m contributions in FY14F/15F from the next acquisition.
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EPS, justified by 33%/25% FY14F/15F EPS growth.
Hiap Hoe is substantially undervalued at 80 cents (even after it has risen from 70 cents just a while back). A successful takeover of SuperBowl will raise its RNAV to above $2 a share. This company is undergoing restructuring with the successful buyout by the Teo siblings of their father's stake. More action to come .