Value creation gets real…. Mastek :: ICICI Securities, report link

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Value creation gets real….
Mastek has announced the merger of Majesco with Cover-All (COVR), an
NYSE listed core insurance systems and services provider. As part of the
share swap deal, Majesco will be listed in the US while Cover-All
shareholders’ (includes potential dilution) would hold 16.5% of
outstanding shares of the combined entity. We believe the deal valuations
could be construed as base value for Mastek’s insurance business even
as incremental value could accrue, over time, with scale and synergy
benefits. Assuming Mcap/sales deal multiple – itself at a 64% discount to
comps – yields | 723 crore value for the insurance piece, in-line with our |
750 crore estimate, attributed in the September 18, 2014 note.
Acquires Agile, announces merger with Cover-All Technologies…
Earlier last week, Mastek announced 1) acquisition of Agile Technologies,
a $9 million revenue run-rate US-based consulting services provider to
the insurance industry and 2) merger with NYSE-listed Cover-All
Technologies, a US-based property & casualty insurance software
provider. The merged company would retain the Majesco brand with proforma
revenues of ~$100 million in FY15E and ~$110 million in FY16E
and with 150+ customers. Recent developments are part of the ongoing
restructuring exercise at Mastek where it plans to demerge its solutions
(55% of revenues) and insurance (renamed Majesco, 45% of revenues)
business. Mastek expects to complete the merger by July 2015.
Deal basics, imputed valuations for combined entity
Majesco will issue 36.25 million shares to existing Cover-All shareholders
in exchange for 27.5 million outstanding shares. This implies share swap
ratio of 1.3:1 i.e. 1.3 shares of Majesco will be issued for every share held
in Cover-All. Back of the envelope calculations imply an imputed market
cap of $209 million for the combined entity given Majesco’s 16.5% stake
is valued at $34.6 million (COVR’s Mcap on December 12, 2014).
Scenario analysis suggests per share value range of | 450-890
Our scenario analysis suggests | 723-1653 crore Mcap can be attributed
to insurance business while solutions business may be worth | 280-340
crore. Our current case assumes – target Mcap/sales multiple of 1.75x for
Majesco US – in line with Cover-All’s acquisition multiple & 64% discount
to global peer group average, 25% hold company discount & target 3x
EV/EBITDA multiple for solutions business (57% discount to peer group
average regardless of | 100 crore cash balance) - and yields a per share
value of | 448. However, we would highlight that our target multiple for
Majesco US is conservative given BenefitFocus – comparable revenue
size to Majesco – trades at Mcap/sales multiple of 7.8x despite making
adjusted EBITDA margins of 3.4%. Finally, our base, best case analysis
yields a per share value of | 600, | 890 (refer exhibit 1) & implies upside
potential of 46%, 117% relative to current market price, respectively.
Raising fair price; thesis obligated by execution and earnings delivery…
We believe the insurance business post Agile acquisition and Cover-All
merger could be a formidable player in the mid-market segment. Further,
value creation in the insurance business is getting real with Majesco’s US
listing. We believe the combined insurance business could be valued at
2.5x on Mcap/pro-forma sales metric (25% hold-co discount, 1.5-2x
earlier) given deeper market expertise and cross-selling opportunities
within the acquired clients while the services business could be valued at
3.5x trailing pro-forma EV/EBITDA. This translates to a fair value of | 600.

LINK
http://content.icicidirect.com/mailimages/IDirect_Mastek_CoUpdate_Dec14.pdf