United Envirotech to acquire Memstar technology for $293.4m

Here's how it plans to fund new acquisition.

According to DBS, United Envirotech has signed a S&P Agreement with key management and shareholders of its key membrane supplier Memstar to fully acquire Memstar’s membrane operation for a total consideration of S$293.4m. Of this, S$73m will be settled in cash and the remaining S$220.1m via the issue of 200m new shares priced at S$1.10 a share (~19x FY14F PE).

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Earnings dilution is substantial in the short term but deal is long term positive. Apart from ensuring membrane supply, this acquisition would enable UENV to be vertically integrated and to ride on growth potential of Memstar’s membrane operations. Financially, the deal values Memstar at 19.9x FY13 PE, which is comparable to UENV’s valuation.

Although this acquisition could boost UENV’s FY14/FY15F PATMI by 1%/6%, the issue of new shares would dilute FY14/FY15 EPS by 18%/14%. Post acquisition and considering full CB conversion, KKR would be the largest shareholder of UENV with 33.7% stake, followed by Memstar with 23% stake.

Acquisition pending shareholders’ approval, maintain. Hold for now. We are maintaining our earnings forecast for UENV pending completion of this acquisition which is dependent on shareholder approval within six months from the S&P agreement. No change to Hold call and TP for now.