Tech Manufacturing Services Sector - CIMB Research 2017-07-28: All Hail Private Equity

Tech Manufacturing Services Sector - CIMB Research 2017-07-28: All Hail Private Equity SUNNINGDALE TECH LTD BHQ.SI MEMTECH INTERNATIONAL LTD BOL.SI

Tech Manufacturing Services Sector - All Hail Private Equity

  • Fischer Tech Ltd announced that it has received a cash offer of S$3.02 per share from US-based private equity firm Platinum Equity Advisors.
  • On the SGX are four plastic injection moulding specialists including Fischer Tech.
  • We highlight the possible valuation range for two of the companies that we cover, Memtech and Sunningdale, as a benchmark against this offer.

Private equity strikes again

  • Platinum Equity Advisors, a US-based private equity firm, has announced a cash offer of S$3.02 per share for SGX-listed plastic injection moulding company Fischer Tech.
  • Fischer Tech's shareholders will be entitled to retain the S$0.06 DPS that the company has proposed to pay for the financial year ended Mar 2017 subject to them granting it the approval for such at its AGM on 28 Jul 2017.
  • Platinum Equity Advisors intends to merge Fischer Tech with an existing investment, Ying Shing Enterprises Ltd, which is involved in a similar business.

Scheme of Arrangement

  • The offer by Platinum Equity Advisors is being made via a Scheme of Arrangement. Details of the offer can be found in the announcement by Fischer Tech.
  • Major shareholders holding approximately 75.48% of the issued capital of Fischer Tech have provided an irrevocable undertaking in favour of the offer.
  • Platinum Equity Advisors has included a switch option in the event a competing offer arises. Subject to approval from SGX, Platinum Equity Advisors intends to delist Fischer Tech.

Acquisition valuations

  • Based on the cash offer of S$3.02 and the historical reported financials of Fischer Tech for FYE Mar 2017, we highlight the proposed acquisition multiples and implied possible values for Memtech and Sunningdale (based on FY12/16 financials).
  • We note that Fischer Tech has the best gross profit margin of 22.2% (FY3/17) versus 16.0% (FY12/16) for Memtech and 13.8% for Sunningdale (FY12/16).
  • Based on the latest full-year results, Fischer Tech's ROA and ROE are 11.8%/12.4% versus 6.7%/8.2% for Memtech and 7.9%/11.5% for Sunningdale.

Maintain Add on Memtech and Sunningdale

  • We have an Add call on Memtech and a target price of S$1.09 (pegged to 10x FY18F P/E, 10% lower than peer average). Downside risks to our Add call include unexpected project delays or cancellation. 
  • We have an Add call on Sunningdale with a target price of S$2.19, based on 1.11x FY17F P/BV (COE: 8.6%, zero growth). Potential re-rating catalysts include better-than-expected cost management and new order wins. Downside risks are order pushback by customers and unfavourable exchange rates.
  • Other than this current offer for Fischer Tech, in Sep 2015, SGX-listed Chosen Holdings (also a plastic injection moulding company) received an offer from Shaw Kwei & Partners Ltd, a private equity firm, to take it private. 
  • Besides the potential rerating from continued earnings growth, M&As (especially from cash-flushed private equity firms) could turn out to be an important re-rating factor for tech manufacturing services firms that are still listed on the SGX.

Highlighted Companies 

Memtech International 

  • ADD, TP S$1.09, S$1.01 close 
  • Memtech is a precision engineering company that has successfully transformed from a keypad components manufacturer into an established supplier to both the automotive and consumer electronics industries.

Sunningdale Tech Ltd 

  • ADD, TP S$2.19, S$2.00 close 
  • Sunningdale has more than 30 years of experience in the precision plastic injection moulding and mould-making industry. Key industries it serves are automotive, consumer/IT and healthcare.

William TNG CFA CIMB Research | NGOH Yi Sin CIMB Research | http://research.itradecimb.com/ 2017-07-28
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.190 Same 2.190
ADD Maintain ADD 1.090 Same 1.090