After discussing with some people, we conclude tentatively that Austin Energy probably cannot be expected to sustain such high profitability. There are projects that do not necessarily recur in the business.
btw, shocked to see the price correct to 13.1 cents today. Good entry point at below 13 cents, I think.
It is highly unlikely that Austin Energy is able to repeat its FY 2014 results in future. However, even if Austin Energy does $5mil - $6mil in future, the price paid would be a reasonable 5X and accretive to earnings.
The insulation business is synergistic to its scaffolding business because both have customers in the petrol chemical industry. Refinery servicing and maintenance is highly lucrative and recurring as petrol chemical companies maintain their heavy plant investments routinely. Take a look at Hai Leck's refinery maintenance business have been fairly stable and generating gross and segment margins of 50% and 20% respectively. If you look at Nordic's scaffolding business, the margins are comparable.
Nordic earned approx. $8m in FY 2014, assuming a reasonable stable earnings for Austin Energy of $5m per annum. Nordic can easily earn $12m-$13m in FY2015. This translates to a PE of 4 at current market price. The management has also committed to give out 40% of its earnings as dividend, and this translates to a yield of 10%. Is this yield sustainable ? YES. The recurring nature of its petrochemical maintenance business alone can generate $10m per annum.
Lastly, its SI and MRO are future growth engines as mentioned by Next Insight.
What makes Nordic attractive is that it is buying a stable business and paying a reasonable price for it. Acquiring a business is a faster way to grow compared to building one from scratch and it immediately contributes to the bottom line.
Of the two growth engines (Acquiring AE and growing the SI business), I believe the acquisition is faster and easier to realise. Together with the dividend increase, assuming that management keeps its promise, will be the main catalyst for a share price increase.
The following actions have to be accomplished by Nordic for the full value to be realised.
1) Complete acquisition of AE
2) Proper integration and execution of AE (Profit approx $5m)
3) Committed to its 40% twice yearly dividend
4) Overall profit of $11m-$13m for Nordic
I believe these are all attainable within the next year, and as for the SI growth, it will take some time.
Axe, good and incisive analysis. I guess Nordic must have done its review critically before making the move. Based on what we know so far the acquisition should be synergistic.
Rather than a cash deal, I would prefer a mix of cash and shares (with a lock in period).
If deal is concluded successfully, this should make Nordic an alluring value play.
By the looks of it, the combined Multiheight and Austin Energy will be a sizeable player in the petrochemical construction services space going by their revenue and net profit.
I doubt Cheng would want to issue undervalued Nordic shares for AE and he only owns 51% of Nordic so any dilution might affect his control, and besides, his willingness to use cash suggests that he is not a cash hoarder.
However, I lack in-indepth knowledge of MH and AE's businesses, anyone with greater insights is greatly appreciated.
Based simply on its FCF, sgd16m for FY14, and assuming if Nordic can generate the same level of performance for FY15, the Group can well afford to fund the acquisition of AE.
The key issue concerns AE. What is its track record and who are the people behind AE?.
From what I see, they are an established player with many large customers and a long track record. However, nothing is set in stone so its performance have to be monitored closely post acquisition
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