800 Super Holdings Ltd: Diversification to laundry and dry cleaning October 4, 2017
PSR Recommendation: BUYStatus: MaintainedTarget Price: SGD1.53
Proposed acquisition of a laundry and dry cleaning business
S$5 mn aggregate consideration payable is 4.2 times over NTA
Intention is for Vendors to continue managing the business
What is the news?
Wizwash Pte Ltd, a wholly-owned subsidiary of 800 Super Holdings Limited (the “Group”) has entered into a call and put option agreement to acquire Iwash Laundry (Senoko) Pte Ltd (“Target”) from Fairlady Jewellers Private Limited (“Fairlady”), Lee Yok Sim (“LYS”), Chua Yun Chean (“CYC”) and Tan Choon Huat (“TCH”) (collectively, the “Vendors”) for S$4,998,960. The sum is to be paid in two tranches. Wizwash Pte Ltd was incorporated on 25 September 2017 with a paid-up capital of S$1 mn.
How do we view this?
Proposed acquisition provides diversification of income stream. The Group would be diversifying outside of its area of expertise, and this creates a new income stream that is not correlated to the existing business lines of waste management, cleaning and horticultural services. However, the Group does not have expertise in the laundry and dry cleaning business and hence would rely on TCH, CYC and LYS to continue managing the business as a wholly owned subsidiary.
Uncertainty over what is a fair price to pay for a laundry and dry cleaning business. There is a lack of listed peers to make a meaningful comparison. However, what we see is the consideration sum of S$4,998,960 is 4.2 times over the net tangible asset (NTA) of S$1.19 mn. In contrast, the Group currently trades at 2.6 times over its book value. As disclosed in the announcement, the principal asset held by the Target is its leasehold property at 80 Senoko Drive. The excess over the NTA could be justified if the property is held at historical cost, but market value is significantly higher than what is recorded on the balance sheet.
The Proposed Acquisition has been classified as a “non-disclosable transaction”. For the net profit of the Target to be less than 5% of the Group’s net profit, we derive that the Group would be paying at least 5.8 times earnings for the acquisition.
Will an agency problem surface? The announcement states that The Group would like TCH, CYC and LYS to continue managing the business under a renewable service agreement. As the Group does not have the expertise in laundry and dry cleaning, we would be cautious of key man risk, should the terms of the service agreement cannot be mutually agreed upon. Moreover, we think the service agreement would need to address any principal-agent problem arising from the acquisition of the business which the Vendors continue to manage.
Maintain Buy; unchanged target price of S$1.53
We like the stock for its recession-proof business model. The ongoing sludge treatment facility project is expected to contribute to Group earnings over the long-term. No changes to our forecasts at this time. Our target price gives an implied FY18e forward P/E multiple of 16.9x. This compares against the Straits Times Index 12-month forward P/E multiple of 14.5x.
About the author
Richard Leow Investment Analyst Phillip Securities Research Pte Ltd
Richard covers the Transport Sector and Industrial REITs. He graduated with a Master of Science in Applied Finance from the Singapore Management University. He holds the CFTe and FRM certifications and is a CFA charterholder.
He was ranked #2 Top Stock Picker for Resources & Infrastructure in the 2016 Thomson Reuters Analyst Awards.