♦ Positive spillover effects from India dual-listing
Meghmani made its secondary listing debut on the National Stock Exchange and
Bombay Stock Exchange yesterday. The stock closed at 28 Rs representing a
55% premium to the 17-19 Rs offer price. Similarly, the dual listing in India had a
positive spillover effect on the Singapore Depository Shares, which trade on the
basis of 1 share: 2 SDS. Although the SDS has gained 46% YTD, Meghmani’s
implied valuation of 13x FY08 PE (fully diluted) is still below Indian peers’
average of 16-18x P/E. Based on the last closing price, the SDS trades at a 14%
discount to the Indian market price. Two-way fungability in the trading of shares
between the SGX, NSE and BSE would only commence after one year.
♦ Fast capacity ramp
Meghmani intends to deploy the proceeds (S$35.4m) to accelerate its move into
high performance pigments through a new plant in Vatva, investing in a new
multi-purpose Agrochemicals plant at Panoli and financing a a 3MW power plant
at Chharodi. The balance of the proceeds would be used to finance working
capital and M&A opportunities.
♦ Pigment market to remain robust
The proceeds from the listing will enable Meghmani to fast-track its expansion
plans to capitalize on strong domestic pigment demand. Meanwhile, the growing
number of registrations for its agrochemicals business allows it to tap a huge
export market. A challenging operating environment in the past 2-3 years, from
high raw materials prices to currency swings, has weeded out smaller and less
efficient players, placing Meghmani in a strong competitive position to supply
intermediate pesticide and pigment products to international downstream players.
♦ Short term valuation priced in given EPS dilution
We estimate a 21% EPS dilution for FY08 on the enlarged share capital.
Consequently, FY08 EPS growth is projected to be flat despite a 25% estimated
growth in net profit. With the dual listing, the stock has re-rated to our 44 cents
target price. With the effect of a higher rating due to its India listing, we are
raising our target PER for SDS to 14x, with an adjusted target price of 51 cents.
Given the spectacular run in share price and considering the absence of further
near-term catalysts, we move our stock recommendation from a Buy to Hold.
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