Wednesday, November 11, 2009

MTQ – Analysis of Purchase Part 3

This is part 3 of my analysis of purchase for MTQ and it will discuss dividend history, share buy-backs, insider purchases and prospects in Bahrain. A pros and cons analysis will follow to show how this led to my final decision to purchase shares in the company.

Dividend History

From the available records, it shows that MTQ has been paying dividends consistently since FY 2001, starting from 1.25 cents and increasing this to 2.5 cents per share yearly. Dividends started being paid from FY 2001 onwards (there were no dividends declared for FY 2000). Twice-yearly dividends have been declared since FY 2003 and have been continuing since then.

As for FY 2008, the 24-cent special dividend was declared due to the exceptional gain from the sale of RCR Tomlinson. Subsequently, gross dividend per share was raised to 3 cents per share for FY 2009.

With the onset of the global financial crisis and the expected slowdown in MTQ’s business, FY 2010 may see dividend falling to 2 cents per share. Coupled with their proposed investment in Bahrain of US$20 million, they may decide to conserve more cash. The mode of financing for the Bahrain expansion has yet to be worked out, but will consist of a mixture of internal cash flows and bank borrowings.

One wild card is their investment in Hai Leck (5.02% currently). Seeing Management’s savvy divestment of RCR Tomlinson makes me believe that they may have enough foresight and acumen to know when to divest Hai Leck and to recognize a decent gain, and a special dividend may be declared in future based on this.

Share Buybacks and Buying by Mr. Kuah Kok Kim

MTQ has bought back a total of 7.48 million shares to date and started out buying in FY 2007 with 4 million shares accumulated. With the planned expansion into Bahrain, it is unlikely that MTQ will continue buying back shares. However, Mr. Kuah himself might carry on buying back shares through his own account. The total issued share capital now stands at 88,059,000 shares (an amazingly small number compared to most listed companies having issued shares of a few hundred million).

To date, Mr. Kuah has a stake of 25.42% in MTQ (about 22.381 million shares). His very last share purchase was recorded on August 17, 2009 when he bought back 100,000 shares at 68.5 cents per share (see Table). Looking at SGXNet records, it seems that Mr. Kuah has been actively buying since June 2009 at prices averaging 65 to 68 Singapore cents, in small amounts and at regular intervals, to slowly increase his stake in the Company. This does signal confidence in the company’s prospects and it is implied that this share price range is a good entry price since his purchases have centred around this range. Though it was noted that business had slowed in the final month of FY 2009 (i.e. March 2009), the fact that he is buying shares in June, July and August 2009 implies that business conditions should have improved somewhat and this signals his confidence in the business. (See table below)

Prospects - Overseas Expansion In Bahrain

On January 5, 2009, it was announced by MTQ that they had obtained in-principle approval from the Ministry of Industry and Commerce of the Kingdom of Bahrain to set up a company and legal vehicle to provide services to the oil and gas industry in Bahrain and the Gulf states. It plans to set up a 100% owned venture (not a joint venture!) to serve customers in the Middle East, and this company will be located in an industrial park called the Bahrain International Investment Park.

The new facility, once completed, will provide engineering, repair and refurbishment services to a wide range of oilfield equipment used in oil drilling operations around the Gulf and surrounding region. The total cost of investment is expected to be US$20 million, including purchase of new capital assets and construction cost. It will be funded by external borrowings and shareholders’ funds.

The rationale for investment is to service clients in the Middle East, which MTQ is unable to reach out to because of geographical distance and also because its current Singapore facility only caters to customers in China, India and Australia (closer proximity). This new company can service clients from the Gulf Cooperation Council (GCC), which is made up of Saudi Arabia, Kuwait, Qatar, the UAE, and the Sultanate of Oman and Bahrain.

The investment is not expected to be profitable in the near-term as it is a green field start-up company, but over the long-term, this start-up is expected to show more potential for growth and may be a steady cash flow generator in time to come.

On June 7, 2009, MTQ obtained official approval from Ministry of Industry and Commerce (in Bahrain) to register a wholly-owned company called MTQ Oil Field Services W.L.L (MTQ Bahrain). This will start off with an initial capital of USD 100,000 and is 99% owned by MTQ and 1% owned by MTQ Engineering Pte Ltd (which is in turn wholly owed by MTQ). The new facility will take up 40,000 square metres, about 3 times the size of its existing operations at Pandan Loop. Staffing is expected to be about 250 people for this new facility (opex as yet undetermined).

Key Merits of Bahrain Expansion

A) Only country in the Middle East allowing for 100% foreign ownership of companies,

B) MTQ will not need to pay corporate taxes (incentive from the Bahrain Government),

C) This is an opportune time as construction and staffing costs are lower due to the global financial crisis, and construction time is also shorter

D) Half an hour away from Saudi Arabia’s main oil production area, and Bahrain is building a causeway to Qatar, which is one of the top gas producers in the world

E) Widespread use of English in Bahrain and sizeable local workforce,

F) Established good long-term relationship with customers who have operations in the Middle East.

G) But has 2 key rivals in Saudi Arabia, one small one in Oman and one in Abu Dhabi

H) Costs for investment in Bahrain would be relatively small for FY 2010, but will jump significantly for FY 2011.

I will require updates from MTQ on this investment, and costs incurred so far to build their new facility. UPDATE: MTQ is proceeding well with the plans for this new facility, and expects it to be operational by early FY 2011.

Pros and Cons Review and Analysis for MTQ


1) The Company is operating in a niche industry for oilfield repair and services well-known clients in the oil and gas industry. Thus, it has high barriers to entry as it has been in this field for over 30 years and has established long-term relationships with its customers, and is well-known for being efficient, reliable and competent.

2) The fact that most of its customers are oil majors means there is a very low chance of bad debts or slow payment.

3) Consistent and steady profitability in oilfield engineering division with high EBITDA and net margins as well as good cash-flow generation capabilities.

4) Cash flow positive for 5 consecutive years with an un-geared Balance Sheet and in a net cash position. This is a significant turnaround from MTQ’s days in the late 1990’s when it was bleeding cash and making losses from a string of questionable investments.

5) A strong, capable and competent Management team headed by Mr. Kuah Kok Kim (Chairman). He has shown himself to be savvy at streamlining operations (from loss-making to profitability) and also in investments (e.g. in RCR Tomlinson and now in Hai Leck).

6) Dividends have been consistent and stable over the years, and historical yield is about 4.5% at last done price of S$0.665, which is much better than inflation and any current bank deposit.

7) The absolute amount of issued share capital is low, and the Company has been buying back shares with available cash, and MTQ is also tightly held by ex-CEO Mr. Kurt Lindblad and Mr. Kuah himself (about 25% held by Mr. Kuah and 20.3% held by Mr. Lindblad as at June 15, 2009 – from FY 2009 AR). Ownership is more valuable when the amount of shares issued is low, rather than owning shares of a company which has a billion issued shares, for example.

8) Mr. Kuah himself has been buying back shares at the 65c to 68c range from June 2009 through August 2009, demonstrating confidence in the long-term prospects of the Group.

9) Historical PER is undemanding at 5.3x, and though this is likely to rise if MTQ’s profits dip in the near term, it provides sufficient margin of safety due to their expansion plans and their good cash reserves of about S$0.20 per share.

10) Good prospects in terms of their planned Bahrain investment, and their track record and close client relationship should ensure long-term sustainable profitability and cash flow generation.

11) With shares being so tightly held and liquidity for the stock being very low, there is also a chance of privatisation at a significant premium to net asset value of 66.5 cents as MTQ is a player in a niche industry which may attract the gaze of larger players who may wish to consolidate their operations and achieve economies of scale.

12) Investment is Hai Leck has so far shown good paper gains, and this is a long-term investment just like RCR Tomlinson was; with a probability that MTQ knows how to exit with good gains (wild card). Hai Leck is also paying decent dividends of 1 cent/share (amounting to S$162,700 for MTQ’s Violetbloom Investments Pte Ltd) so this should add to MTQ’s cash stash. From Hai Leck’s 1 for 3 warrants issue at 1 cent, this implies a cash outflow of just S$54,237; and the warrants are exercisable at 26 cents. The premium on the warrants is now 24.5 cents and the potential cash inflow for MTQ from the sale of ALL warrants is another S$1.33 million.

13) Management’s candour is very much appreciated – not afraid to admit they made errors and are willing to admit and learn from mistakes.


1) Engine systems division is a headache as it has very low EBITDA margins and net margins and this shows quite clearly. Since FY 2005, the division has not performed well and has been a consistent drag on MTQ Group’s total performance and profitability.

2) Management has demonstrated that they make mistakes like when they invested in the Subsea Robotics (i.e. ROV) business in FY 2001. It turned out to be loss-making and sapped a whole lot of cash before it was finally divested in FY 2006.

3) There is constantly a need to invest in capex due to the nature of the business, but this is expected to moderate for Singapore operations as the CEO has mentioned that most of the upgrading work has already been done.

4) Risk is involved in their Bahrain venture in case the business there does not take off to the size and scale which they originally anticipated, or if their competitors rob them of market share and depress revenues. There is thus no guarantee that after investing US$20 million, this facility will eventually be profitable and cash flow positive.

Based on the above analysis of 13 pros versus 4 cons, and considering the fact that Management have been shareholder-friendly and are competent in allocating capital and resources, a decision was then made to purchase part-ownership of the company. However, since there is persistently low trading volume in this counter, accumulation would have to take place through a series of purchases. This was done over 6 trading days and my total investment in MTQ at this point in time amounts to about S$27,000.

Following this last post on analysis of purchase, I will be posting up my review and analysis of MTQ’s 1H FY 2010 results at a later date, pending the results announcements of the other companies in my portfolio such as Boustead, Tat Hong and China Fishery.

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