AWC Berhad: Qudotech and DDT Acquisitions

Just a fortnight ago, AWC berhad made an announcement to propose to acquire QudoTech and DD Techniche for RM26.5 mil by combination of cash and issuance of 30.66 mils new shares at a issue price of RM0.38 worth RM11.65 million.

The acquisition is expected to be completed in 4Q15

The vendors made a profit guarantee of combined RM3.9 mils profit after taxed for each of the next 2 financial years.

In case there is any shortfall between the PAT of the target companies and the profit guarantee, the payment to the vendors will be reduced by the same amount of shortfall.

The group will issue 30.65 millions new shares which is equivalent to 13.6% of existing share capital at a issue price of RM0.38 to raise RM11.6 million while the rest of acquisition cost comes from internal cash and the payment is made in 3 phrases.

The first RM7 million is the down payment while the second and third payment only need to be paid upon confirmation that the profit guarantee is met at the end of the respective financial years.

Based on the profit guarantee, PE will be around RM26.5/RM3.9 = 6.79.

Unfortunately, the acquisition announcement did not show much details on the 3 financial statements of the 2 target companies, so EBIT/EV could not be measured.

Qudotech involved in M&E engineering works, specifically in all manners of plumbing works and currently has RM66 million order book on hands.

Revenue was increasing for the past 3 years. What's more with increasing profit margin with the latest half year result record at 12% net profit margin, up from 7% in FY2012. 

ROE was more than 30% too with minimal borrowings and gearing. 

DDT is involved in contracting for mechanical works, piping and systems design for rainwater harvesting products and trading of specialized water tanks. 

DDT is considered as a new start up company. The company just incorporated in 2012. 

Net profit was increasing too with expected closed to RM1 million net profit would be recorded in the latest financial year ended June 2015. 

DDT stands to benefit from the regulatory to make rainwater harvesting systems a mandatory part of building plans for commercial and industrial buildings with a roof area equal to or exceeding 100 square meter in Perak, Selangor, Johor, Melaka, Kelantan and Perlis. 

So, I think it's not that hard for the 2 target companies to meet the profit guarantee of RM3.9 million. 

There is a proforma shown based on the profit guarantee added on top of the net profit attributed to the shareholders at FY2014 and divided by the enlarged no. of outstanding shares, EPS is 4.24 cents.

Based on the share price now, the valuation may not cheap. Worst case, the EPS will be diluted due to the ESOS implementation.

And historical record showed that the group's existing business is not so stable especially the engineering division.

Margin of safety is not there.

Will only look at it again when the price is right or the group's fundamental improves.

AWC Berhad: Getting more than ABC

AWC Berhad is not a well known company with market capital less than RM100 million. 

I came to know him when the group made an announcement regarding its acquisition that will probably increase its top & bottom line. After watching how latitude, chin well, Ge-Shen and KESM performed after acquisition, I think I need to spend some time to understand it. 

The group has 3 divisions,

Facility division involved in asset management services providers such as cleaning, civil & Structural works, M&E maintenance, parking, landscaping and transport system.  Facility division holds the 10-year concession to provide maintenance for some buildings of Federal Government Common User buildings and contributed a bulk to the group's revenue.

Engineering division provides Ventilating & Air-conditioning system, Building Automation System and Security & Crisis management system to clients. It also distributes valves and hydronics systems.

Environmental division provides automated waste collection system called STREAM to transport municipal solid waste via pipes to a central waste handling facility. So that the waste collector does not need to go door-to-door to collect the waste. It's noted that the group owns only 51% of this division

The group made a loss at FY2008 due to poor performance as well as one off provision and impairment. 

That year, the group developed a Business Transformation Plan (BTP) to refocus on its core business, improve human capital management, develop the group's facility division into market leader and expand its STREAM business to Middle East. 

Well, the management able to improve the group's performance from loss making, but not to the extend that called splendid or awesome. 

The group's performance thereafter was quite volatile, maintained around RM100-200mil and RM4-10mil top line and bottom line respectively. Net profit margin was 3-6%.

The group once had a technology division (IQL group) before but it made RM3mil and RM7.3mil losses in FY2011, FY2012 respectively. Soon, the group decide to divest this division in June 2012.

In terms of balance sheet, the group was in net cash all this while with minimal borrowings.  

This can be explained by the group need very less amount of capex every years.

Its operating cash flow was well-supported by the concession with the government. Just sometime the increases in trade receivable dragged the operating cash flow into negative region, probably due to Middle East contracts. 

The group's cash conversion cycle was below 90 days all this while which is considered okay to me. 

In terms of ROE, the group managed to record only single digit number for the past few years. 

For its ROIC, it's around 15%, except the spike recorded in FY2010 and FY2011 due to better operating profit. It's noted that in 2011, the group cancelled out RM0.20 out of par value of RM0.50  to RM0.30 to off-set the accumulated losses.

Its engineering division did not fare quite well all this while, its profit margin was quite low and contributed very minimal to the group's bottom line

The group was focusing more on its 2 other divisions, namely facilities and environment.

Facilities division provides stability to the group. 75% of the Facilities's revenue derived from the concession with the government to provide asset management service while the rest came from the private sector. But the management need to manage its operating costs very well and it's noted that the electricity costs account for more than 40% of the Concession's cost of sales. 

Environment division depends on its STREAM, the automated waste collection system. 

Throughout the past few years, the group managed to clinch some contracts in UAE through the job venture with Model Building UAE and Dallah Establish to design and supply automated waste system. However there was a second project in Al Reem Island worth RM150 million was delayed until today as the development there was stop. 

Apart from that, STREAM is well-accepted at our neighbor country, Singapore too.  The group was also awarded operations and maintenance contracts for the STREAM systems such as in Terminal 3 Changi and Resort World Sentosa after completion which provide recurring income to the group.

With lesser amount of development in near future, it's expected the award of STREAM system to the group will slow down. But nevertheless, the system is quite good in terms of convenience, cleanliness and cost saving. It's just matter of time the developers will start utilize such system in their development especially at place where space is limited. 

Based on some online articles, the division had around RM60 millions order book at the end of Dec 2014. 

So, that's the basic study on the group

Will discuss the acquisition in the next post.