XMH acquired Mech-Power Generator

Here's how acquisition will boost earnings.

According to OSK, XMH has acquired diesel-powered generator sets manufacturer Mech-Power Generator (MPG).

OSK noted that the deal is strongly EPS-accretive, reduces business risk through diversification into adjacent sectors and immediately removes constraints on its growth. XMH remains in a net cash position and is poised to acquire more companies.

Here's more:

Target acquired. MPG provides diesel-powered generator sets to the industrial and commercial sectors. It is believed to be the single largest player in the SGD100m market with a ˃20.0% market share.

Effective purchase forward P/E of 4.0x. XMH will pay SGD17.425m for MPG in two tranches, one in CY13 and one in CY15 – each 50% cash and 50% shares.

MPG must also provide a SGD6.9m profit warranty in total over the next two years – we expect this to be easily exceeded.

Full-year MPG profits 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 earnings.

The former’s margins are trending upwards due to recently-signed high-value, higher-margin contracts, with more on the horizon.

Mutually-beneficial arrangement. This deal will allow XMH (operating now at full capacity) to immediately expand its operations via MPG’s 1.7ha Iskandar Malaysia land, and bypass Singaporean workspace and foreign-worker constraints.

The latter will also benefit from the former’s strong balance sheet and access to financing to further grow its operations.

More acquisitions to follow. Post deal, XMH remains in a net-cash position and is still on the lookout for more acquisitions.

We raise our 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 XMH’s next acquisition.

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