Acquiring another firm is one of the strategic ways to expand the company to seek higher growth, and enables the company to reach out to a broader audience or gain some expertise of the target firm. Whatever the reason for the acquisition, it is a sure way to inorganically expand the size of the firm. Below, we will examine two stocks that are worthy to add to your portfolio as they are likely to seek expansion through further acquisitions.
At the end of the year, Christmas and New Year Holidays normally see a surge in the supply of part-time jobs for hire as extra manpower is needed. For staffing and manpower management firm HRnetGroup, this means higher business volume would come from strong demand for flexible staffing during the festive season and hence would bode well for its performance in 4Q17.
Notwithstanding that, the proposed acquisition of Rimbun Job Agency is likely to be completed by 1Q18, which will see the group establish a new brand HRnet Rimbun to pave way for expansion into Indonesia.
Meanwhile, the group still holds a significant amount of cash on hand amounting $280 million while free cash flow per year fluctuates in the range of $15 million to $20 million. Coupled with the fact that the group’s business sees low capital expenditure requirements in nature, HRnetgroup is undoubtedly in a position to carry on with further acquisitions.
This may precisely be the strategy that the management team has in mind as they have already signed several non-disclosure agreements for the consideration of acquiring firms from different countries eventually. The group has yet to reach major markets like Japan, China, Australia and Europe, and it is possible that the group is looking to acquire local firms to commence their expansion into these regions. In addition, HRnetGroup could be targeting niche recruitment firms that specialises in a certain industry or sector, to boost its existing profile. According to HRnetGroup’s management, the group has set aside a $200 million budget for acquisition purposes.
By back-of-the-envelope method, assuming HRnetGroup acquire target companies at an average price-to-earnings of 10 times, a $200 million budget would accrete about $20 million to its bottom line. Correspondingly, that would be a 50 percent boost to net profit. As such, RHB iis maintaining its Buy call on the stock with a target price of $1.14, cautioning that increasing competition and changes in the general economy are potential downside risks. (Current share price: $0.75)
Moya Holdings Asia
After its latest acquisition of Acuatico, Moya Holdings Asia (Moya) has transformed itself into the “largest and only listed treatment water player in Indonesia” according to RHB. In the latest 3Q17, Moya’s growth reflected the full accretion of Acuatico, as revenue surged 834.7 percent to $45.8 million while net profit more than doubled to $5.5 million.
Acuatico’s contribution can potentially increase net profit even more, considering that almost 41 percent of water leakages (non-revenue water) are not recovered and sold. The leakages can be stopped by upgrading the rusty leaking pipes to functional ones to prevent leakage and hence increasing the amount of saleable water. Management is already looking to reduce non-revenue water by 50 percent gradually by 2023, which is expected to help improve revenue and margins significantly.
Being the largest water treatment firm in Indonesia also gives Moya significant bargaining power when negotiating terms for the acquisitions of smaller firms. Moya currently has $100 million worth of cash on hand which can be used to acquire more private water treatment firms to meet its expansion goals.
Notwithstanding that, Moya is also looking to expand two of its water plants, Bekasi and Tangerang, coupled with additional capital expenditure to refurbish and reduce non-revenue water in the next five years. This would be organic growth for Moya, as it increases its capacity and expands the margins for the two plants.
With a high internal rate of return for water treatment in Indonesia standing at about 15 percent (double of China), increasing its capacity to produce more clean water is lucrative and should help to increase its net profit. Expecting that Moya will be able to cut costs further, increased capacity, expanding margins and additional acquisitions in the pipeline, RHB analysts are positive about Moya’s outlook. As such, RHB maintains a “Buy” call on the stock with a target price of $0.17. (Current share price: $0.09)