Hms Hydraulic S Regulatory News (HMSG)

5 Aug 2011 08:49

HMS Hydraulic Machines & Systems Group plc(the "Company", and together with its subsidiaries, the "HMS Group")

HMS GROUP TO ACQUIRE BELORUSSIAN PUMP MANUFACTURER

Moscow, Russia - August 5, 2011 - HMS Group (LSE: HMSG), the leading pump manufacturer and provider of flow control solutions and related services in Russia and the CIS, announces today that it has entered into a share subscription agreement. In accordance with the agreement, the company undertakes to subscribe for 100% of newly issued shares equal to 57% of a share capital of Bobruisk Machine Building Plant (the "Plant"), located in Bobruisk, Belarus - one of the largest manufacturer of specialist centrifugal pumps in the CIS - for a total cash consideration of USD 9.6 million.

Completion of the agreement is conditional upon actual holding of the Plant's shareholders meeting and their approval of the public offering, as well as upon permission and state registration of the offering on behalf of an authorized governmental body of the Republic of Belarus.

Transaction Rationale

HMS Group will pay total cash of USD 9.6 million for 100% of newly issued shares equal to 57% of the share capital of the Plant. The transaction will be fully financed with available debt capacity. All funds invested in the Plant will be used for the development of new product lines and purchase of relevant new equipment. HMS Group acquires the Plant under authorization of the Belorussian government, and is considered to be a strategic investor. The acquisition is expected to be closed in autumn 2011.

Artem Molchanov, Managing Director (CEO) of HMS Group, commented:

"We continue our development in accordance with the strategy, presented during the IPO. With the intended acquisition, taking into account our marketing and R&D capabilities, HMS Group will be able to substantially increase revenues of the Plant, to broaden our company's product portfolio, and to provide our clients with more integrated solutions in oil refining and petrochemicals."

Attractive market segmentsWith the intended acquisition, HMS Group will enter the "hot cycle" oil refining pumps and related equipment market, and acquire new technologies. The Plant complements the existing business of HMS Group in "cold cycle" oil refining pumps. The Group will significantly increase its market shares in the segments of pumps for oil refining as well as for metallurgy and mining applications.

Oil refining and petrochemicals is one of the largest markets for pumps in Russia with an estimated market size of around USD 107.2 million and expected CAGR 2011-2015 of 15.8%2. The market offers strong growth potential in the modernization of existing refineries as well as new objects constructions. This positive market outlook is supported by strong underlying factors: a number of large-scale investment projects, increasing processing depth as stipulated within the Russia's Energy Strategy 2030 as well as growing demand for higher quality fuels due to expansion and modernization of the Russian vehicle fleet and government-backed switch to Euro 4 and Euro 5 fuel standards.

The market of pumps for metallurgy and mining applications is estimated to reach value of USD 51.1 million in 2011, and is forecasted to grow at CAGR of 18.0% in 2011-20153. One of the main demand drivers is Russia's prospective entry into the World Trade Organization, when Russian metal manufacturers will gain new opportunities abroad and obtain additional capex incentives, which, in turn, will boost the pump market.

Recognizable brands portfolioFor decades, the Plant has been generating good references and recognizable brands portfolio, especially in oil refining and metallurgy and mining industries, resulting in a large installed base across Russia, the CIS and other countries.

The Plant has significant production capacities, allowing substantial increase in its revenueThe Plant designs, manufactures and supplies centrifugal pumps and appliances used in oil refining, petrochemical, metallurgy and mining, power generation, pulp and paper, cement industries, as well as for handling pure and waste waters in municipal, agricultural and industrial water systems. The Plant remains one of the few suppliers in the CIS of mission critical pumps for key technological processes in refineries, metallurgy and mining production.

In 1H 2011, the Plant achieved sales of approximately USD 7.8 million with EBITDA of USD 1.0 million, implying a 13.4% EBITDA margin. The business has around 950 employees.

The Plant has a complete production cycle: from foundry with unique metal alloy handling competence to machining and assembly. Its significant production capacities will allow increasing the Plant's revenue substantially.

Opportunity to create a production center of refining pumps, including those to the API standards, and pumps for metallurgy and mining applicationsHMS Group, holding a significant share in the oil refining pumps market, has identified this market segment as one of its top priorities. Through the Plant's acquisition, the Group seeks to strengthen its position in this segment. The acquired Plant will become the production center of pumps for refineries and pumps for metallurgy and mining applications. The investments will be made into foundry and new high precision machining centers that will enable production of new API pumps.

Potential growth of revenue and EBITDA margin of the acquired companyCombination of the Plant's production capacities and recognizable brands portfolio with marketing and sales power of HMS Group, including clients' provision with integrated solutions, will increase the Plant's revenue and EBITDA margin, substantially.

HMS Group targets Plant's EBITDA margin to grow up to 16-18% and revenue to increase more than twofold, within few years.

The business of oil refining pumps and pumps for metallurgy and mining applications will represent an attractive platform for continuous growth in the future. The complimentary pump types of the Plant and HMS Group enable further technological development of integrated pumping solutions. The combined product portfolio also offers cross-selling opportunities.

This acquisition has attractive deal multiples and structureThe cash consideration of USD 9.6 million corresponds to annualized 2011 EV/Sales multiple of 0.7x pre-money, and annualized 2011 EV/EBITDA multiple of 5.6x pre-money4.

Overall, the transaction is a great fit with HMS Group. It will create value for customers, employees of both companies, and HMS Group's shareholders.

In our online investor kit (www.grouphms.com/shareholders_and_investors), you will find the following documents:

The HMS Group is the leading pump manufacturer and provider of flow control solutions and related services to the oil and gas, nuclear and thermal power generation and water utilities sectors in Russia and the CIS. The HMS Group's products are mission-critical elements of projects across a diverse range of industries. It has participated in a number of large-scale infrastructure projects in Russia, including providing pumps and modular equipment to the Vankor oil field and pumping stations on recent trunk pipelines projects linking Russia's core oil producing areas to export ports on the Pacific Ocean and Baltic Sea. The Group reported revenues of RUB 7.1 billion, adjusted EBITDA of RUB 1.6 billion and profit for the period of RUB 1 billion for the three months ended March 31, 2011. The HMS Group's global depositary receipts ("GDRs") are listed under the symbol "HMSG" on the London Stock Exchange. www.grouphms.com

For further information, please contact:

Investor Relations: Inna Kelekhsaeva, Deputy Head of Investor RelationsPhone: +7 (495) 730-6601 x 1318, Kelekhsaeva@hms.ru

Media Relations: Nozima Karimova, Head of Press ServicePhone: +7 (495) 730-6610, Karimova@hms.ru

DisclaimerThe information contained herein has been prepared using information available to HMS Hydraulic Machines & Systems Group Plc ("HMS Group" or "HMS" or "Group" or "Company") at the time of preparation of the presentation. External or other factors may have impacted on the business of HMS Group and the content of this presentation, since its preparation. In addition all relevant information about HMS Group may not be included in this presentation. No representation or warranty, expressed or implied, is made as to the accuracy, completeness or reliability of the information.

Any forward looking information herein has been prepared on the basis of a number of assumptions which may prove to be incorrect. Forward looking statements, by the nature, involve risk and uncertainty and HMS Group cautions that actual results may differ materially from those expressed or implied in such statements. Reference should be made to the most recent Annual Report for a description of the major risk factors. This presentation should not be relied upon as a recommendation or forecast by HMS Group, which does not undertake an obligation to release any revision to these statements.

This presentation does not constitute or form part of any advertisement of securities, any offer or invitation to sell or issue or any solicitation of any offer to purchase or subscribe for, any shares in HMS Group, nor shall it or any part of it nor the fact of its presentation or distribution form the basis of, or be relied on in connection with, any contract or investment decision.

1 American Petroleum Institute2 Frost & Sullivan's "The Russian Pump Market", April 20113 Frost & Sullivan's "The Russian Pump Market", April 20114 According to National Accounting Standards

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