Following its 10 Nov 2021 announcement of an offer to privatise Starburst Holdings, Nordic Group has now laid out a suite of proforma financial metrics to show the compelling case for its biggest acquisition ever.

Earnings-wise, on recent data, Starburst is as big as Nordic: Both companies reported 1H2021 earnings at the $7+ million level.

By annualising their combined 1H2021 metrics, Nordic showed how much rosier the enlarged Nordic group would be on a proforma basis.

All this without issuing new shares, as Nordic will pay cash to acquire Starburst.

This table shows how it adds up:
 

Starburst
(1H21)

Nordic
(1H21)

1H21 combined proforma

2021 annualised combined
proforma

Revenue

$20.5 m

$49.2 m

$69.7 m

$139.4 m

Net profit

$7.4 m

$7.8 m

$15.2 m

$30.4 m

EPS

2.99 cents

2.0 cents

3.9 cents

7.85 cents


The key takeaway: Nordic's earnings per share in full-year 2021 theoretically would be 7.85 cents a share assuming a 100% takeover of Starburst completed at the start of 2021.

The PE ratio would work out to be 5.1X based on the recent 40 cents share price.

Without the acquisition, the annualised EPS would instead be 4.0 cents (ie 2.0 cents from 1H21 x 2) -- and Nordic's PE would be 10X.


starburst BLASTICS

It's not just the PE metric but many others that overnight become brighter for Nordic upon the takeover.

Notably, the proforma dividend yield for Nordic shareholders would be around 7.8% (based on 40 cents stock price), instead of 4%. (Both estimates are based on a 40% payout ratio).

For clarity on the impact on many metrics, see pages 23-30 of Nordic's presentations slides here.  

Starburst is currently at least 69.7% in the hands of Nordic as Starburst's chairman and CEO both have undertaken to sell their combined stake of 69.7%.

While the deal is hugely positive for Nordic, it also looks great for the two vendors since it's difficult to find a suitor which can pay them cash amounting to S$41.2 million in one fell swoop. 

The acceptance rate by Starburst shareholders has to hit 90% for Nordic to compulsorily acquire the remaining 10%, failing which Starburst stays as a listed entity. 

Below we share Nordic chairman Chang Yeh Hong's response to 3 key questions raised by investors at a briefing last Friday:

#1. Starburst has a volatile earnings history, so is its strong 1H2021 earnings sustainable going forward? 

Mr Chang said Starburst's business deals with security-sensitive projects, which means a high barrier to entry. 

Not surprisingly, Starburst has enjoyed high gross profit margins (40-60%) and net profit margins (26-42%), except in certain years when it took on infrastructure construction projects.

"
Not many businesses can offer you these kinds of margins. In the normal core business that they can do and deliver, I think it's a very, very healthy business that we can appreciate and consider," said Mr Chang.

Starburst reported a strong $90 million order book in its 2020 annual report.

#2. Won't Nordic's gearing ratio go up substantially by borrowing to pay for the acquisition? 

Mr Chang said Nordic plans to borrow $41.2 million, which would raise Nordic's gearing from (0.13) -- ie a net cash position -- to 0.34.

It's a very low gearing, he said, and will not translate into exceedingly high interest expense -- just about $1 million a year on the $41.2 million loan.

In fact, dividends will continue to be robust at an unchanged 40% payout ratio as the 2021 proforma combined EBITDA is estimated at about $40 million.

The EBITDA, a proxy for cashflow, is large enough to cover dividends of around $12 million out of $30 million proforma net profit (ie a 40% payout ratio).

Nordic Group’s M&A track record

FY2011 Multiheight Group

FY2015
Austin Energy

FY2017
Ensure Engineering

FY2019
Envipure Group

FY2022
Starburst

Acquired 100% for around S$29m

Acquired 100% for S$26m

Acquired 100% for around S$17m

Acquired 100% for S$14.8m

S$59.1 m, assuming 100% acceptance of takeover offer


#3. What's the thinking behind buying Starburst, whose business looks different from Nordic's? 

Mr Chang outlined a number of criteria, a key one being the potential for a target company -- with engineering background -- to expand or broaden Nordic's existing products and services to its existing clients. "We are actually trying to tap the same pockets of our customers."

Starburst has niche skills as a formwork specialist, for example, which Nordic does not. We don't know how to build steel plates, but there are many applications that many of our existing clients require." 

Conversely, can Nordic cross-sell to Starburst’s customers? "Yes, we have insulation services, we have mechanical … even scaffolding services that we can cross-sell to Starburst’s customers.”

Significantly too, Starburst brings with it clients from the defence and security industries that are not easy to acquire - and in new geographies such as Middle East. 

changyehhong11.21 quote

 


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