KEY POINTS:
Mooring Systems' ship-berthing technology looks great. Few doubt that it has the potential to be widely adopted by the world's ports. However, when it comes to assessing the value of the shares, that does not amount to much.
The innovative Christchurch company is next year to be absorbed into the Dutch firm Cavotec. The deal - a reverse takeover - will see Mooring issue 50 million new shares, diluting the existing shareholders' stake so they hold just 20 per cent of the new entity.
A more important question for New Zealand investors is what are the prospects for Cavotec?
The lay investor could be forgiven for shying away.
Finance firm Crighton Anderson summed up part of the problem: "The product range is diverse and difficult to effectively describe to a lay audience."
At the same time, it is hard to fathom why a private Dutch engineering company would list on the NZX - the practical effect of the Mooring Systems takeover.
Dutch public equity markets are noted for their efficiency and the firm's senior executives are based in Europe - although disconcertingly not in the same city. Surely Cavotec would find it easier to build an investor following in Europe's deeper capital markets, rather than here?
Cavotec tries to get over the first problem with the still less-than-illuminating catchphrase "connecting mobile equipment". The company has developed a niche in providing electricity to mobile industrial equipment such as wharf cranes or mining jigs. Its core technology is a reel from which a cable can be wound and unwound as, for example, a crane moves back and forth along a container wharf.
Cavotec has also adapted this technology to a range of other applications. A key feature of these power reels is so-called slip-rings. These transfer power from the core of the reel to the equipment; no mean feat since the reel, and thus the connection, is constantly rotating.
One innovation has been Cavotec's application of slip-rings to ship propulsion. In the future, many ships' main propulsion will be electric motors attached to columns that rotate through 360 degrees.
The set-up - already adopted by some new cruise ships - allows propellers to serve as a steering system as well as a system of propulsion, saving space and fuel.
Mooring Systems fitted with Cavotec's strategy. Its products were innovative and had potential to grow. Cavotec's sales force in more than 30 offices around the globe was already talking to potential Mooring Systems customers and could gain incremental revenue and benefit from Mooring's growth.
Mooring Systems benefits from the network and Cavotec's clout. Customers would prefer to deal with a firm with the finances to offer warranties, rather than a loss-making tiddler with 10 employees.
Proof of the merger's potential already exists. Cavotec, for example, after getting the licence for Mooring Systems' technology in Europe, secured the trial with Oman's Salalah Port Services.
This deal is important because Salalah is partly owned by the Maersk shipping group, the world's largest container line. In short, the deal has the potential to win over a high-profile sponsor.
The strategy, as last week's results showed, has also delivered financially. In August Cavotec forecast sales in the year to December at €87.5 million and net profits of €5.25 million. But in the nine months to the end of September, it had nearly achieved its 12-month goal. Sales stood at €81.2 million and net profits stood at €5.2 million.
Cavotec has also performed in the long term. In 2003 sales stood at €58.82 million and profits at €2.2 million. If Cavotec achieves its goal, it would have achieved a compound annual growth in sales of 14 per cent a year and a compound growth in profits of 33 per cent. And the growth in the last two years of this period has been organic.
Even if it did not merge with Mooring Systems, Cavotec forecasts sales will reach €165 million in 2011, while its free cash flow will reach €10 million.
The second question is less easy. Cavotec claims it wanted to list here because it would get greater profile than in Europe, where news is dominated by giants such as Vodafone. It likes New Zealand's legal system and proximity to the major growth markets of the Pacific rim.
It also says there is no way it could finance a cash acquisition of Mooring Systems. Mooring Systems' loyal shareholders had bid up its value to nearly $50 million, so a cash buy would have boosted Cavotec's debt by two-thirds. As Mooring Systems was producing no profit, the burden on its balance sheet would have been too great.
Together these explanations sound plausible - but doubt still remains.
So what about value? After the merger, the company will have a market value of just over $295 million. This is equal to around 20 times next year's forecast profits, which are due to grow by 45 per cent from an estimated $10.11 million to $14.67 million.
Compare this with sharemarket darling Fisher & Paykel Healthcare. It is now trading at 27 times March 2008 earnings, which according to consensus estimates are due to grow by 34 per cent.
Cheap? No. But if it all pans out as Cavotec hopes, not expensive either.
