In October 2008, M/s Investcorp Gulf Opportunity Fund, a private equity fund had agreed to take 36% stake in Redington’s Middle East and Africa (MEA) business for $98 million. Out of this it has already received $65 million for 27.17% stake in MEA business.
Some part of the money is expected to be used for acquisitions in Middle East, Turkey and Asia. However, as of now nothing has been decided and thus we await further details from the management regarding the same. As and when Redington announces the acquisition it would be positive as it would lead to increased revenues and profitability going forward.
At the current market price of Rs263 the total market cap of Redington is $427million (1$ = Rs.48) as against MEA business valuation of $272 million, which contributes ~41% of total PAT of Redington Thus we see good value unlocking in long term for the shareholders of Redington.
Valuation & Recommendation
We maintain our earning estimates and expect Redington to report EPS of Rs23.1 for FY10E. At Rs.263, the stock trades at fair valuations of 1.8x book value, 11.4x earnings and 10.3x cash earnings based on FY10E.
We continue to remain positive on the long-term growth prospects of the company as we feel that Redington is poised to handle a greater share of the business in supply chain solution space with its unique business model, proven execution capabilities and its presence in potential markets.
However due to recent sharp run up in its stock price and limited upside potential of 5% from current levels, we recommend investors to look for buying opportunities at lower levels.
Thus we are downgrading the stock of Redington from BUY to ACCUMULATE with unchanged price target of Rs275.