Sunday, November 15, 2009

MTQ – 1H FY 2010 Financial Analysis and Review

MTQ released their results for 1H FY 2010 (they have a March year-end) on October 28, 2009. Since the company only releases results every half-yearly instead of quarterly as they are below the S$75 million market capitalization threshold, this means that I will only be able to review the company’s performance every six months, barring any updates which the company may provide in the meantime. A pleasant surprise I got was a newsletter which the company sent out to all shareholders to provide updates on the Company – most companies I know do not do this and MTQ is certainly very shareholder-friendly in this respect. This is even though its shares are not very liquid and the company is relatively unknown.

My analysis will be split into the usual 3 sections as per my other analyses for my companies; and at the same time I will discuss briefly on prospects and plans.

Profit and Loss Analysis

As expected, revenues dropped 12% year on year from S$45.3 million in 1H 2009 to S$39.8 million in 1H 2010. This was due to softer demand for the Company’s oilfield engineering services as many oil and gas projects were put on hold as a result of the financial crisis and subsequent recession. Engine systems, however, remained relatively resilient and managed to slightly increase its revenue level (in AUD), but with a forex translation loss the net effect was a S$0.2 million decrease in revenue in SGD terms.

The revenue mix has also changed slightly as a result of the weakness in Oilfield Engineering versus the resilience shown by Engine Systems. Previously, and in my analysis of purchase, I had stated Engine Systems as one of the “cons” as my analysis had thrown up the fact that operating margins were low and revenue was flat over the last couple of years. However, it was a pleasant surprise to learn that revenue from Engine Systems stayed fairly constant at S$19.5 million (down S$0.2 million from 1H 2009’s S$19.7 million), compared to Oilfield Engineering’s revenue drop to S$19.7 million from S$25.4 million. As a result, the revenue mix for Oilfield Engineering versus Engine Systems shifted from 56%:44% to 50%:49% (remaining 1% came from “others””).

Gross margin had actually improved from 39.5% to 41.4% even though revenue fell, and this was due to the reduction in COGS by 15% against the 12% drop in revenues. Gross profit, as a result, fell only 8% from S$17.9 million to S$16.5 million. Other income rose substantially from S$705K to S$2.3 million, and this was mainly due to one-off transactions of about S$2 million comprising realized gain on disposal of available-for-sale investments as well as the Singapore Government’s Jobs Credit Scheme. Staff costs actually fell about 7% but other operating expenses increased 15% due to an exchange loss booked for the Engine Systems division. The result was PBT of S$8.5 million for 1H 2010, flat against the previous year. Lower taxation meant that net profit after tax improved 3% from S$7 million to S$7.2 million. Net profit margin was 18.1% against 15.4% last year. However, stripping out the one-off gain of S$2 million, MTQ would have reported a net profit of just S$5.2 million, a drop of 25% from prior year. Net profit margin would have been 13.1% in the absence of the one-off gains, due to the higher other operating expenses amidst falling gross profits.

Balance Sheet Review

One fact I wish to mention is how much analysts have “hyped up” MTQ’s NAV of 82 cents as at Sep 30, 2009, and using this as a basis for recommending a BUY on the company due to the fact that it is trading below book value. The truth is that this adjusted NAV (up from about 66.5 cents as at March 31, 2009) is a result of the increase in fair value of available-for-sale securities, as reflected under “Long-Term Assets” in the Balance Sheet. Investment securities rose 140% from S$4.1 million as at March 31, 2009 to S$9.9 million as at Sep 30, 2009; mainly as a result of the across the board increase in market prices of quoted equities for most bourses around the world. Thus, the NAV is predicated on market values and should not be relied on without due consideration on the nature of composition of the NAV.

Inventories remained relatively stable, with only a slight 6.5% increase mainly due to forex translation differences. Debtors increased 12% to S$18.3 million, and this was marginal and could be a result of slower payment by customers due to the credit crunch. However, overall cash and bank balances increased 26% from S$22 million to S$27.7 million, and net cash increased even more by 32.4% from S$17.6 million to S$23.3 million. Overall, current assets had increased due to the inflow of cash, and current ratio stood at 3.1 as at Sep 30, 2009 against 2.6 as at March 31, 2009. Quick ratio had also improved from 1.94 to 2.3 during the same period.

Total borrowings remained fairly constant at S$4.45 million as at Sep 30, 2009 against S$4.44 million as at March 31, 2009. Current liabilities actually fell slightly due to marginally lower trade payables and also lower provision for taxation, while being slightly offset by a marginal rise in long-term liabilities from S$6 million to S$6.18 million due to a rise in deferred tax liabilities and provisions.

Overall, the Balance Sheet is healthy as the company has sufficient working capital of S$43.4 million, high current and quick ratios and a net cash position.

Cash Flow Statement Review

In my analysis of purchase of MTQ, I had highlighted the nature of their cash flows and how MTQ had consistently positive operating cash flows for the 5-years under my analysis (from FY 2005 to FY 2009). This has not changed with 1H FY 2010 registering a healthy positive operating cash flow of S$5.75 million. What’s different this time though is that capital expenditure amounts to just S$990,000, which means there is FCF of about S$4.75 million for 6 months ended Sep 30, 2009. This was a contrast to my 5-year analysis showing just 1 year of FCF and 4 years of negative FCF due to the need for investment in fixed assets to keep up with the Oilfield Engineering Division. However, one should also note for comparison sake that for last year, there was capital gains tax paid on disposal of RCR Tomlinson which pushed operating cash flows into the negative. Without this one-off tax, cash flows for 1H FY 2009 would have been positive.

Under investing cash flows, there was a net inflow of S$1.5 million due to the timely divestment of quoted shares, raking in S$2.5 million. If one compares the cash inflow of S$2.456 million from this sale against the gain on sale of S$1.863 million, it would be apparent that MTQ had made a gain of 314% over their cost of S$593K. Thus, Management have once again demonstrated that are adept in timing the disposal of their investment in quoted equities, similar to the timing of disposal for RCR Tomlinson back in FY 2008. Note that there was also a minor purchase of quoted shares worth S$172K, against last period’s cash outflow of S$4.16 million from subscription of shares in Hai Leck’s IPO.

Financing activities was relatively muted and the main movements were for dividends paid out and small amounts of repayment and taking up of bank loans. Net cash outflow was reduced from S$3.8 million last year to just S$1.79 million due to the absence of share buyback for 1H FY 2010.

It is worth noting that with the 1 cent per share interim dividend being declared, this represents a cash outflow of just S$880,600, which comprises just 3% of their total cash reserves of S$27.7 million. Note that dividends are NOT paid on the treasury shares of 7.48 million, and this can be verified by glancing at the cash outflow of S$1.761 million for 1H 2010 – it was the payment of the final dividend of 2 cents per share on 88,059,117 shares (which excluded the treasury shares). The Company is probably retaining the bulk of their cash for their Bahrain expansion, which they estimated would need US$20 million (about S$27.6 million using SGD 1.38 to the USD). This is already adequately covered by their current cash balance without them having to take on additional loans, and since their business is cash flow positive this cash balance will rise further throughout FY 2010 and part of FY 2011. I will discuss more on the Bahrain project in a later section.

Bosch Superstores

Along with their 1H FY 2010 announcement came the press release for what MTQ terms “Bosch Superstores”, which is a collaboration with world-renowned Robert Bosch Group to sell Bosch products in Australia, using MTQ’s network of 9 outlets throughout Australia. MTQ will be awarded distribution rights to all of Bosch’s product range in Australia, and will act as a “one-stop shop” for customers looking for Bosch products. In addition, the company would be able to cross-sell their existing products too.

This arrangement will be effective from November 1, 2009 and according to an interview Mr. Kuah gave to NextInsight, the incremental cost for the Engine Systems division will be small (in the range of just S$200,000 to S$300,000) because the infrastructure is already in place. All that is needed is to add more shelf space and to hire more sales staff. However, the potential revenue boost will be significant, and as MTQ puts it, they expect the turnover to “increase substantially” in the near future. Partnering with Bosch also means that MTQ can substantially increase their current customer base, and Mr. Kuah expects MTQ to double its Engine Systems customer base from the present 1,250 to 2,500. The reason for the partnering was because Bosch was unable to effectively distribute their products throughout Australia using their present supply chain.

One thing to note, however, is that margins for the Engine Systems division are very low. In my Analysis of Purchase Part 2, I highlighted that EBITDA margins for this division for FY 2009 were only 3.6%, compared to Oilfield Engineering’s 28.5% EBITDA margin. Net margin was even more dismal at just 1.4% for FY 2009, and prior to FY 2009 Engine Systems consistently recorded a net loss. While one can argue that the partnership with Bosch may allow them to increase the selling prices of their products as they are now offering a one-stop solution for customers, it remains to be seen if this division can sustain profitability and even if so, what the margins will be moving forward. Readers should note that increasing revenues significantly without keeping COGS under control will amount to nothing. One mitigating factor is that Mr. Kuah mentioned that the incremental cost of selling Bosch products will be small compared to (presumably) the potential revenue boost, and we shall have to wait for subsequent years to hopefully see the positive financial effects of this collaboration.

MTQ Bahrain - An Update

MTQ had announced back in Jan 2009 of their intentions to set up a facility in the Kingdom of Bahrain, similar to their Pandan Loop facility but three times larger. I had also discussed this at length in my previous post on Analysis of Purchase Part 3. The latest update as obtained from the NextInsight interview and MTQ’s presentation slides states that everything is going as planned, and the design has been finalized and construction will take place in early 2010. The facility should be operational by early 2011. What was not mentioned, however, was how the project would be funded; whether through internal funds or through bank borrowings as well. I suspect it’s a mixture of the two, since MTQ can generate operational cash inflows of about S$3.7 million (average for FY 2005 through FY 2009) per year. With their current cash balance of S$27.6 million as at Sep 30, 2009, and their previously stated requirements of about US$20 million, I expect they should not have to gear up too much.

Prospects - Oilfield Engineering

With the recession slowly easing, oil and gas projects are also re-starting, albeit slowly. Note that Keppel Corp has not announced any significant rig contract for some time now, but the industry news I’ve read about indicates that oil and gas E&P spending will start to rise again from the sluggishly low levels of 2008. This fact, coupled with many ageing rigs out in the market, should provide MTQ’s Oilfield Engineering Division with a decent volume of business in their Singapore branch, though the rates they can charge may still be depressed due to the fragile nature of the economic recovery. Mr. Kuah himself had mentioned that activity was expected to pick up from 2H 2010, and with the building of the new Bahrain facility, there would be potential for further growth. Mr. Kuah did caution that the Bahrain facility will be a green field project and thus may not contribute to profits for at least 2-3 years.

Prospects – Engine Systems

With the above section discussing the MTQ-Bosch deal, I guess nothing more needs to be said about the prospects for Engine Systems till we can see some tangible results. But the overall feel is that this deal by the Company is very positive and will enable the division to achieve steady long-term growth and better margins.

Prospects – Other Long-Term Investments

With Management’s astuteness being demonstrated in RCR Tomlinson and more recently, Hai Leck; it is reasonable to assume that they would be able to identify other suitably attractive investment opportunities. They can thus put their cash hoard to good use as stock markets have not fully recovered as at this point, and bargains are still out there. It will be heartening to know that Management has used their sharp insights to purchase under-valued companies, and to divest them at a suitably appropriate future time.

My next analysis will be 6 months later when MTQ releases their FY 2010 results some time in May 2010, as they do not do quarterly reporting. I will only do an update if there are any further material developments relating to the company.

4 comments:

tagskie said...

hi.. just dropping by here... have a nice day! http://kantahanan.blogspot.com/

Musicwhiz said...

Hi tagskie,

Thanks for dropping by. And you know I love music and lyrics too eh? Haha.

Cheers,
Musicwhiz

PGL said...

How will dilution due to the issue of new shares and its impact on EPS affect your Fair Value or Target Price?
PGL

Musicwhiz said...

Hi PGL,

I am surprised you asked this question of me. In the first place, I don't set "target prices" on the companies I own. And when there are events such as placements or dilution, then there should be a specific purpose for them, otherwise it is earnings and dividend-dilutive. I hope to own less of such companies in the future; and instead own companies which pay back the monies they generate as dividends back to the shareholder.

Thanks,
Musicwhiz