Tuesday, May 17, 2011

MTQ – FY 2011 Financial Results Analysis and Commentary Part 1

MTQ released their FY 2011 financial statements and press release on April 29, 2011. This financial statement release marks a change somewhat for MTQ, as they had finished building their Bahrain facility and have got it up and running for FY 2012. The numbers have also reflected this and at face value, it would seem to have got a lot worse in terms of Balance Sheet and Cash Flow Statement analysis (more on that later). Since January 2009, I had knowledge of MTQ’s intended plans to expand into Bahrain, and they have worked tirelessly for the past 2 years towards that goal. They have gone through a leadership change (Kuah Kok Kim retiring as CEO and making way for his son Kuah Boon Wee) and also turmoil in Bahrain in March 2011 which followed the revolutions in Egypt, Tunisia and Libya. Though there have been some problems getting the facility started, the equipment had already been purchased and staff trained, and it was a matter of time before the Oilfield Engineering Division got a boost from Bahrain operations.

This analysis is more broad-based and will not just focus on the financials (though that will be the main focus for this Part 1), but also touch on other aspects such as business division review (a brief one, without spreadsheets), Neptune Marine Services in which MTQ invested quite a large chunk of money into; and also comment on some other Management changes and qualitative aspects of the Company. I hope these are comprehensive enough for the reader to get a better understanding of where MTQ is headed from here, and what the prospects are like for this progressive Company.

Profit & Loss Statement

Interestingly, revenue grew 11.9% year on year for MTQ, as there was a surge in revenue coming from Engine Systems division due to the recent M&A activities relating to this division. OEM repair and rental also saw Oilfield Engineering’s revenue rise by $2.6 million, thereby contributing a little to the revenue increase. Gross margins dipped only slightly from 41.1% a year ago to 40.9%, but still remained high overall if compared to the last five years where gross margins did not manage to breach the 40% mark. This does continue to demonstrate that MTQ has a competitive edge and can maintain pricing power for the goods and services which it provides.

Net profit dipped to $10.6 million, down 11.7%, but this was in light of a gain on disposal for FY 2010 of $1.9 million and also an adverse movement in fair value of financial instruments. Removing these effects, net profit would have been higher by about 19%. The good news is that operating profit improved 17% for Oilfield Engineering, and 45% for Engine Systems. Engine Systems seems to have gained the much-awaited traction from their collaboration with Bosch, and also as a result of their expansion into Northern Territory and purchase of Highway Diesel back in August 2010.

One notable mention is the 19% increase in expenses even as gross profits only increased by 11.3%. I will attribute this to the increase hiring of staff to man the Bahrain facility, and also increased training costs to ensure these staff are well-equipped with the necessary skills to service the oilfield equipment and blowout preventers which are sent to the workshop.

The very good news is that valuations are far from demanding for MTQ, and I was using the current price of about 84 cents per share which values MTQ at a historical price-earnings ratio of about 7. In recent days the price has fallen to 82 cents which makes valuations even less demanding, yet dividend yield based on FY 2011 is a very healthy 4.8% (4 cents per share, cash or scrip choice is given). Of course, one has to take into account the fact that the Company had taken on significantly more debt (to be elaborated on under Balance Sheet Review) in order to expand and enter the Middle Eastern market, and so perhaps Mr. Market is discounting MTQ’s earning power due to potentially higher finance costs (note that for FY 2011, finance costs only increased marginally from $160K to $258K, though it was a 61% jump). I will mention a little more about prospects and plans for MTQ in Part 2 and delve into each separate division, but note that the Bahrain facility has already been completed and the machinery has been purchased and installed. Operations have already started as at FY 2012 and revenue should start to be recognized in the current financial year.

Balance Sheet Review

In terms of Balance Sheet changes, MTQ had a fair share of them this time round! First of all, PPE went up by nearly 123% ($22.8 million) as a result of the new facility being completed in Bahrain, and all the associated equipment and machinery which was moved into the workshop. Purchase of shares in Neptune Marine Services (“NMS”) listed on ASX also led to an increase in investment securities from $7 million to $17.2 million (up 144%). Reconciliation between cash flow statement and balance sheet is as follows (for those who are interested): $12,917K cash outflow on purchase of NMS shares, net of brokerage minus $2,762K loss on fair value of available for sale investments = $10,155K which is the increase in the investment securities as stated in Balance Sheet.

Trade Receivables dipped 12.6%, which is a positive sign of good cash management as revenue had increased year on year. Current ratio stood at 2.43 for FY 2011 compared to 3.01 for FY 2010, mainly due to the slight drop in prepayments and the increase in short-term loans. However, 2.43 is still a very healthy current ratio; and quick ratio for FY 2011 was 1.76 which also signalled that MTQ could service its current liabilities without problems.

The most significant change in MTQ’s Balance Sheet has to be the level of debt, and the Company took up significant amounts of debt in order to fund its Bahrain expansion and to buy equipment and machinery. Current portion of long-term borrowings increased from $1.7 million to $3.3 million (nearly doubling), while long-term borrowings (>1 year repayment) increased from $1.6 million to $24.1 million. In effect, MTQ’s debt had increased from $3.3 million to $27.3 million; and the Company is now once again in net debt of $3.5 million compared to being in a net cash position of $16.9 million a year ago. Recall that it was the sale of RCR Tomlinson back in FY 2008 which eliminated all the Company’s debt and pushed them into net cash. Now, it seems that the Company is planning to repeat the cycle – invest at very low valuations into an Australian-listed company, and use existing funds + debt to expand its operations to grab a larger slice of the pie and to grow organically as well. More will be mentioned on these plans in Part 3.

It would be interesting to find out the interest rate at which MTQ had borrowed the money at, now that interest rates are hovering near all-time lows. It is known from previous announcements that the loan was disbursed by UOB but the tenure of the loan was not stated. The idea of leverage is to borrow money at low interest rates in order to generate ROE and ROA at much higher rates through business expansion, and MTQ has to ensure that the increase in finance costs does not over-shadow the increase in revenues and associated profits from their business expansion into Bahrain.

ROE was a lower 13.6% compared to 16.3% a year ago, but was still comfortably above 10%.

Cash Flow Statement Analysis

Cash flows were rather “abnormal” for this period (i.e. FY 2011) mainly due to MTQ’s drawdown of loans for their expansion into Bahrain, and also because of their investment in NMS which entailed a large investing cash outflow. Operating cash flows showed a very large inflow of $22.4 million, while capex was very high at $25.8 million, thus resulting in negative free cash flow of $3.4 million. Interestingly, MTQ has only had one year of FCF out of 7 years, but they have managed to not only pay steady dividends over the years, but also increase these dividends. One of the reasons for this could be their strategic investments in shares like RCR Tomlinson and (as yet unproven) NMS. More will be mentioned of NMS in Part 3 of this analysis.

There is nothing much else worthy of mention as readers will know the reasons for the large cash outflow for investing activities and the large cash inflow for financing activities. The key is to review the Cash Flows again for 1H FY 2012 to see if there is any improvement in both revenues and cash flow, in order to pay off the interest expense charged by the bank(s).

For Part 2 of the analysis, I will touch on MTQ’s business divisions and their growth thus far, and also talk a bit about margins and operations. I will also include an interview done by NextInsight with MTQ to glean some insights on the business and to talk about some of the plans and prospects. Part 3 will cover quite a bit about NMS as it is a major investment by MTQ, and close off by talking about Management changes and what we can expect from the Company, as well as my decision on choosing scrip dividend over cash.


JTK said...


It’s always good to read your analysis.
What do you think the fair value of MTQ would be? How would you derive the fair value and margin of safety?

I wonder why ROE of MTQ is lower compared to other O&G companies such as Hiap Seng, Rotary Engineering.


Musicwhiz said...

Hello JTK,

I don't currently have a fair value per se on MTQ, meaning no absolute number. As long as the business is doing well and growing, I am willing to keep my shares for the medium-term.

Hmm, well not too fair to compare with those companies as they are EPC contractors while MTQ is into distribution and servicing. Hence, am not very sure why their ROE is higher.