Sunday, May 22, 2011

MTQ – FY 2011 Financial Results Analysis and Commentary Part 2

Part 2 of my MTQ FY 2011 analysis will focus more on MTQ’s business division performance, and I will comment on how well each division is doing and what it has achieved over the years. Some history will be useful as well if we were to track the growth and fortunes of these two divisions (Oilfield Engineering and Engine Systems) more closely. However, instead of regurgitating the whole nine yards of what happened for each division for the last ten years, I will instead keep it simple by just focusing on the major events which have occurred in the past financial year (FY 2011).

Oilfield Engineering

Needless to say, the main thrust of the expansion drive in Oilfield Engineering Division is the expansion into Bahrain for most of FY 2011. The land size there is 40,000 square metres and is three times the size of MTQ’s premises in Singapore (Pandan Loop) and will be on a 50-year lease. From my understanding, Phase I has been fully completed and Phase II should kick off soon, and in total it can house 250 employees, most of whom will be locals. A NextInsight Interview with Mr. Kuah Boon Wee (CEO) gave insights to the new facility, with him saying that the complex has been physically constructed and the equipment commissioned. However, due to the uncertain and volatile political situation in Bahrain (and in light of violent riots and clashes between civilians and Government forces), staffing has been kept to a minimum of 25.

The tense political situation and subsequent unrest had also caused delays in certification for MTQ’s Bahrain machinery and business was affected when oil majors shifted their executives out of the country, thus depriving MTQ of the chance to be placed on vendors’ lists. However, some operations had already commenced and revenue was already being booked in April 2011 (FY 2012).

Engine Systems

In late FY 2010, MTQ had announced the acquisition of the business assets of Premier Fuel Injection Pty Ltd, and this was a strategic thrust for them to expand into Australia’s Northern Territory in which they previously had no presence. That purchase was made with A$500,000 and has helped MTQ Engine Systems division to expand its reach.

In April 2010, MTQES entered into a S&P agreement to sell off its premises at 32 Raynham Street in Salisbury, Australia, for a consideration of A$975,000 less agency fees. This will bring in more cash for the Group in order to further expand this division.

Then in August 2010, MTQES purchased Highway Diesel from Permacliff Pty Ltd and paid an upfront consideration of A$1.5 million. This acquisition will allow MTQES to further expand its range of services and repair capabilities and is viewed as being positive in the medium-term.

So all in all, there was quite a lot of activity in this division as well and MTQ are not resting on their laurels and intend to build this division and strengthen it. Next, I will present some of the numbers which I have compiled and use these to comment on the progress of each division, and also theorize on what we can expect in the coming financial year of FY 2012.

Review of Business Divisions and Comments on Prospects

If we look at the numbers for revenue since FY 2005, you will notice that this has trended up from $56 million in FY 2005 to the current $91.7 million in FY 2011, and this shows MTQ had steady revenue growth for the last 7 years. What is more interesting, however, is the relative contribution of their major business divisions to total revenues. Around FY 2008 to FY 2010, Oilfield Engineering was taking up the bulk of revenues and this peaked in FY 2009 with the division taking up 61.7% of revenues, while Engine Systems took up a much smaller 39%. It seems that with the Bosch partnership and the expansion as outlined above, Engine Systems has now begun to contribute more to revenues. In fact, revenue has surpassed that of Oilfield Engineering by about $6 million and now takes up 54% of total revenues against 50.2% a year ago. I would expect Oilfield Engineering to play catch up in terms of revenue contribution as the Bahrain operations get started, and begin contributing to both top and bottom lines.

In terms of segment net profit, Management’s ongoing focus in streamlining operations in Engine Systems has yielded positive results, with revenues in this division not only showing a steady increase, but also yielding growth in operating profits and net profit margin. Segment net profit for Engine Systems has hit a 7-year high of $2.7 million and segment margin is now 5.4%, up from 3.2% a year ago. It would appear that the synergistic collaboration with Bosch has enabled margins and revenue to grow, while keeping costs low. Mr. Kuah Kok Kim did mention in a previous interview with Next Insight that partnering with Bosch widened their customer base, yet did not drive costs up much because all they needed to do was increase shelf space (minor M&E works) and recruit more staff to cross-sell products. The numbers do look much better at the moment compared to just 2 years ago when it seemed that Engine Systems (selling turbochargers and diesel fuel injection systems) would be a drag to MTQ’s otherwise highly profitable Oilfield Engineering business.

For Oilfield Engineering, there was a slight slowdown in activity but with a strong customer base, the division still managed to grow slightly. In view of the BP Deepwater Horizon rig disaster, more stringent certifications will be needed in future for blowout preventers (“BOP”) in order to make sure they are fully functional and serviced within a reasonable period of time. MTQ has the required certifications and is recognized as one of the few players capable of servicing BOP and other O&G equipment.

Plans and Prospects for Business Divisions

Nothing specific was actually mentioned regarding growing each division. In the FY 2011 press release, the CEO mentioned that high oil prices and strong order flow of sophisticated rigs and other offshore vessels bode well for MTQ, and I take it to imply the Oilfield Engineering division will ride on this wave to grow even further. The commencement of operations for MTQ’s Bahrain Facility and subsequent Phase II of construction will also help to boost revenues, and once the Annual Report is out it will shed more light on MTQ’s borrowing costs, so that I can use that as a comparison against the returns derived from their push into Bahrain.

As for Engine Systems, nothing specific was mentioned either but I would expect MTQ to build on the momentum of recent acquisitions in order to broaden their revenue and customer base. There should be more details in the chairman and CEO’s statement which will be released along with the Annual Report some time in July 2011. Also, there will be a chance for me to attend MTQ’s AGM to ask more questions about the business moving forward.

For Part 3, I will be touching on a key move made by MTQ just a while back – the purchase of 100 million shares in NMS listed on ASX for A$0.05 per share. Since this has taken up nearly $12 million worth of cash, I consider it as a major transaction and worthy of more in-depth analysis and coverage. I will end off Part 3 with a few of my thoughts and closing remarks for MTQ, until it releases its 1H FY 2012 results in late October 2011.

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