Dutech Holdings Limited - CIMB Research 2016-10-07: Completed acquisition of METRIC

Dutech Holdings Limited - CIMB Research 2016-10-07: Completed acquisition of METRIC DUTECH HOLDINGS LIMITED CZ4.SI

Dutech Holdings Limited - Completed acquisition of METRIC

  • Dutech announced that it completed the acquisition of METRIC on 5 Oct.
  • We believe the purchase consideration of €2.94m (Rmb22m) is favourable and would not be a stretch to Dutech (Dutech has Rmb219m net cash as at end-2Q16).
  • We are positive on the acquisition, as we see significant synergy between METRIC and Dutech’s existing businesses.

Completed acquisition of METRIC

  • Dutech announced that it completed the acquisition of certain assets of METRIC mobility solutions AG (METRIC) on 5 Oct. The acquisition consists of: 1) certain assets of METRIC in Germany, and 2) 100% of the issued share capital of METRIC Group Holdings, METRIC’s wholly-owned subsidiary in the UK.
  • Established in 1978 and listed on Frankfurt stock exchange, METRIC is a solution provider of ticketing systems and mobile data collection systems and operates in Hannover, Germany. METRIC Group Holdings was acquired by METRIC in 1999; its main products are parking ticket machines and it operates in Swindon, UK.
  • Dutech conducted the acquisition with the insolvency administrator, as the holding company of METRIC had filed for insolvency in Jun 2016.
  • Major shareholder of METRIC is Droege Capital GmbH (Droege), a German private equity firm. Droege has been a value-adding strategic shareholder of Dutech since 2011, after it sold Format (now Dutech’s German safe manufacturing subsidiary) to Dutech and received sales consideration in the form of 8% of Dutech shares.

Purchase consideration is favourable and not a stretch to Dutech

  • The purchase consideration of €2.94m, or Rmb22m, was arrived at on a willing-buyer, willing-seller basis and will be funded by internal resources of Dutech.
  • We believe that acquisition would not be a stretch to Dutech’s balance sheet, given the group’s sturdy net cash position of Rmb219m as at end-2Q16.
  • We note that the purchase consideration is at a significant discount to the acquired inventory book value of c.€4m and the intangible assets (software and patents) book value of c.€9m, based on insolvency administrator’s evaluation. As such, we expect negative goodwill to be recognised by Dutech at its 4Q16 financial results.

We view the acquisition positively

  • We like the acquisition as it expands Dutech’s sales network in Europe, given METRIC’s strong presence in Germany (FY15 sales: €35.9m) and the UK (€22.8m).
  • We see significant synergies between METRIC and Dutech’s existing businesses.
  • We believe that Dutech will be able to improve the financial performance of METRIC post acquisition, by utilising its low-cost production base in Nantong, China to supply intermediate products to METRIC, reducing the overall cost structure of METRIC.
  • The acquisition would also expand Dutech’s IT and software capabilities and allow Dutech to offer higher value-added services to existing and prospective customers.

Be patient while management turns around METRIC

  • We believe that it may take 1-3 years for Dutech to streamline operations of METRIC to eventually turn it around. During this period, METRIC could post a slight drag to group bottomline. Having said that, we expect the possible drag to be capped by METRIC’s FY15 net loss (c.Rmb22m vs. Dutech’s Rmb118m net profit), as METRIC’s assets would be comprehensively impaired before Dutech takes control.
  • Despite our positive view on the acquisition, our current valuation and EPS forecasts have yet to reflect its impact, due to limited financial info at this stage. We keep our Add call while highlighting the potential upward adjustment to our DCF-based target price of S$0.61 (WACC: 12%). Key risks include fluctuations of FX and steel price.

Roy CHEN CFA CIMB Research | Willam TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-10-07
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