KBC Advanced Technologies Acquisition

The acquisition of Infochem gives KBC a good foothold in upstream oil and gas and substantially expands the company’s software capability. KBC is paying a premium rating for these attributes, but this is a strategically important step, the process was competitive and a low cost of debt keeps the acquisition earnings enhancing.

Delivering The Long Vaunted Move Upstream
KBC is buying Infochem Computer Services, a supplier of reservoir fluid modelling software, for an enterprise value of £9.5m. This marks KBC’s first major step in a new growth strategy to move into the more buoyant (and potentially higher-margin) upstream oil and gas segment and to grow the contribution of software sales.

Reservoir Fluid Modelling
Infochem’s fluid modelling software, Multiflash, enables its clients to maximise the recoverable reserves from fields. Clients include asset owners, operators, oilfield service companies and EPC contractors globally. The business recorded sales of £1.2m in 2011, with a healthy £0.6m PBT, and is growing at a double-digit rate. It is London-based and two of the three founders will remain with the combined entity.

Premium Multiple But Earnings Enhancing
KBC is paying £9.5m net of cash balances (£10.9m gross) for Infochem. This equates to a premium 7.9x EV/sales ratio or 16x PBT, but the deal is strategically important to KBC and larger competitors/oil field services companies were also competing in the process. Funded through cash resources and debt (detailed overleaf), we estimate the deal will enhance earnings by 2% this year and 8% next, excluding synergies. We understand that Infochem has been turning away consultancy business, creating a short-term opportunity to drive sales synergies through leveraging KBCs relevant in-house consulting resource and associate network.

Valuation: Clearer Growth Strategy Gives Scope For Re-Rating
This deal gives KBC a good foothold in the more buoyant upstream oil and gas segment and investors clarity on the growth strategy. Further acquisitions to enhance KBC’s technical and economic modelling capability are likely to be considered. We remain mindful of the need to replace the Pemex business as it drops away next year, but with clarity on this, we believe that appreciation to a double-digit 2013 P/E rating would be very justifiable, implying at least 20% share price upside.

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