Nordic CEO Dorcas Teo at a FY2014 results briefing recently.
NextInsight file photo.
'Axe' recently made the following observations in the NextInsight forum. In the early part of his post, he refers to Nordic's proposed acquisition of Austin Energy which achieved pre-tax profit of S$9.9 million in FY2014.
It is highly unlikely that Austin Energy will be able to repeat its strong FY 2014 results in future.
However, even if Austin Energy does $5mil - $6mil profit, the price paid by Nordic would be a reasonable 5X and accretive to its earnings.
The insulation business of Austin Energy is synergistic to Nordic's scaffolding business (under MultiHeight Scaffolding) because both have customers in the petrochemical industry.
Refinery servicing and maintenance is highly lucrative and recurring as petrochemical companies maintain their heavy plant investments routinely.
Take a look at Hai Leck's refinery maintenance business -- it has been fairly stable and generating gross and segment margins of 50% and 20%, respectively. Nordic's scaffolding business' margins are comparable.
Nordic earned approx. $8m in net profit in FY 2014. Assuming reasonable stable earnings for Austin Energy of $5m per annum, Nordic can easily earn $12m-$13m in FY2015.
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This translates into a PE of 4 at the current market price of its stock.
Nordic's management has committed to give out 40% of its earnings as dividend, and this translates to a yield of 10%.
Is this yield sustainable? YES. The recurring nature of its petrochemical maintenance business alone can generate $10m per annum.
By the looks of it, the combined MultiHeight and Austin Energy will be a sizeable player in the petrochemical construction services space going by their past revenue and net profit.
Lastly, Nordic's System Integration and MRO (maintenance, repair and overhaul) businesses are future growth engines as mentioned by NextInsight.
What makes Nordic attractive is that it is buying a stable business and paying a reasonable price for it. Acquiring a business is a faster way to grow compared to building one from scratch and it immediately contributes to the bottom line.
Chang Yeh Hong, executive chairman of Nordic Group. NextInsight file photo.Of the two growth engines (acquiring Austin Energy and growing the System Integration business), I believe the acquisition is faster and easier to realise. Together with the dividend increase, assuming that management keeps its promise, the acquisition will be the main catalyst for a share price increase.
The following actions have to be accomplished by Nordic for the full value to be realised:
1) Complete acquisition of Austin Energy
2) Proper integration and execution of Austin Energy (Profit approx $5m)
3) Committed to its 40% twice yearly dividend
4) Overall profit of $11m-$13m for Nordic
I believe these are all attainable within the next year, and as for the System Integration business segment growth, it will take some time.
