patersons new report - 10.8c valuation

VDM Group Ltd (VMG) $0.049
Recommendation: SPEC BUY
Analyst: David Gibson Tel: (+618) 9263 1664
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Cash-backed construction play
Investment Highlights
• We have updated our model following VMG’s announcement that it will proceed with a sale of the Cape Crushing subsidiary. Following the sale VMG will receive up to $28.0m in cash to fund working capital and as a result our price target is 17.4% higher at 10.8c/sh. With shareholder approval likely in our view we believe key catalysts remain new contract wins and a return to profitability.
• VMG to sell Cape for up to $53m. VMG has reached an agreement with CFC Group to sell Cape for $48m plus a potential earnout of up to $5m. Approximately $25m of hire purchase liabilities will be retired as part of the transaction leaving VMG with $23-28m in cash from the sale. As the price is largely in line with the carrying value we don’t expect any material tax charge.
• 2H profitability to remain intact. The company has indicated that the construction business has continued to grow and the sale of Cape will not impact the previous forecast for a profitable 2H12. We understand this also extends to cashflow with OCF expected to be positive in the 2H.
• What will the new VDM business look like? Post the sale of Cape Crushing VMG can be considered a recovering construction business with turnover approaching $400m (management are aiming to replace the lost earnings with new construction work) plus a consulting arm operating at close to break-even.
• Strengthened balance sheet for improving construction sector. Upon settlement of the Cape sale VMG will have approximately $38.0m in cash (4.1c/sh) with minimal debt to fund working capital. Given considerable bonding requirements for construction projects we believe this will assist in winning new work.
• Price target & catalysts. Our blended price target (based on an average of 5.9x 12m forward EBIT and NTA) is higher at 10.8c/sh due to higher cash balances and two months of roll-forward. Key short-term catalysts include new contracts and better profitability.