About Mencast Holdings
Established in 1981, Mencast manufactures and supplies sterngear equipment and provides sterngear services for a wide range of commercial vessel applications.
Mainly caters to customers in the offshore oil and gas and marine industry, our customers include local and regional shipyards and owners, such as the subsidiaries within the offshore and marine business division of Keppel Corporation Limited, Labroy Shipbuilding and Engineering Pte. Ltd. and the subsidiaries of SembCorp Marine Ltd.
Led by a dedicated and experienced management team, as well as equipped with advanced machinery and strong technical expertise, Mencast is committed to providing quality products and services to our customers. We are one of the first sterngear equipment manufacturers in Singapore to obtained the ISO9001:2000 Quality Management System certification. In addition, we achieved the Singapore SME 500 award for two consecutive years in 2005 and 2006.
Strategically based in Singapore, Mencast is well-positioned to ride on the growth in the offshore oil and gas and marine industry.
Structure of Group
(as taken from mencast.com.sg)First Thoughts on Mencast
When I was first told about Mencast and what they did, he looked at it as they provided a unique service that shipping companies needed. Furthermore, there were no other companies that specialized in building and maintaining ship parts.
The first thought that hit me was shipping. Earlier in the year, I did a research on dry bulk shipping and the shipping industry as a whole and not surprisingly, there was overcapacity in the sector resulting in low freight rates. Tankers however, fared better than dry bulk, with a higher demand.
I am currently avoiding shipping counters currently and may review it after this earnings season. (I bet those people out there holding NOL and Cosco will be laughing at me right now.) So when he first told me about Mencast, I was (and still am) negative about the industry as compared to the company itself.
I will give the upside on the industry at the end of this piece, although I remain underweight on it.
Mencast Income Statement
Since 2007, Mencast's revenue has grown approximately 39.19%, and COGS has been at 54% of sales on average over the past 3 years. Since its IPO in 2008, the Sterngear Manufacturing division's revenue has dropped by 3%, while the Sterngear Services division revenue increased by 16%, all together contributing to a 4.83% increase in revenue since its IPO.This large topline growth has contributed to a 35% adjusted growth over 3 years for operating profit. One thing to note about operating profit for 2009. The Other Gains includes one off gains, and the figure of 35% does not take into account this one off gain. Net Profit excluding one off gains increased by 25% since 2007.
Since the IPO however, excluding one off gains, Operating Profit has increased by 5%, and Net Profit, excluding one off gains (in this case I included the IPO expense as a one off), fell by 1% from 2008 to 2009.
This translated to a P/E ratio of 6.6 at the end of FY2009, and a 3 year trailing P/E of 7.2.
Taking into account the theoretical growth rate (ROE x Retention Ratio) using the amount retained by the company, the PEG ratio comes in at 0.67 assuming continuous 20% growth. Using the earnings per share growth, however, the PEG ratio was 1.22 for FY2009. This assumes that the P/E of SGX trades at a 50% discount to NYSE.
Mencast Balance Sheet
Mencast NAV value for 2009 was SGD0.181, an increase of 4cents from 2008. Its NTA, however, was SGD0.16 for FY2009. This translated to a P/B ratio of 1.65 for FY2009. ROE decreased due to a decrease in the Asset Turnover Ratio, due to the increased amount of PPE they have taken on since the IPO.The company has also taken on long term debt of 8345k at YE2009, compared to 2937k at YE2008. The increase in Finance Expense in the income statement to 1.3% of sales from 0.5% of sales shows that the company has incurred more debt, though not necessarily a bad thing should they wish to expand.
Mencast Cash Flow
Mencast Free Cash Flow has been positive over the past 3 years, with FCF 52% of Operating Cash Flow for 2009. For 2009, the dividend paid was 47% of its free cash flow.
Opinions on Mencast
Mencast is tied closely to the shipping industry, and with the shipping industry still at the bottom of a down cycle, I believe that Mencast would be have a buy rating if we are looking at industry wise, and if there were no opportunity costs. However, purchasing Mencast stocks exposes us to opportunity costs as we would have to wait to see signs of recovery from the Shipping industry.
Mencast is slightly overvalued at this current time, especially with limited growth prospects. The issue with Mencast is that there are no other companies to do relative comparisons.
Due to my negative forecast on the shipping industry, coupled with the analysis of Mencast, I would not think right now is the correct time to purchase Mencast Holdings Inc.
Shipping Industry
For readers who are still reading this, I wish to point out something regarding the shipping industry. Right now shipping seems to be at the bottom of a down cycle, and the question should be asked how low can it go. If your analysis tells you that the economy is recovering and commodities boom is going to reduce the capacity of the shipping sector, you should purchase shipping companies. I believe shipping would recover by 1H2011, and I actually own shares in a LTL company, YRC Worldwide, although it is banking more on the turnaround of the company, and hopefully an early recovery in transportation.
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