Wednesday, August 17, 2011

MTQ – FY 2011 AGM Highlights Part 1

I attended MTQ’s AGM held on July 22, 2011 at 10:00 a.m. at Carlton Hotel conference room (new wing). This was my second time attending MTQ AGM since I became a shareholder in late 2009, and last year’s AGM was also held at Carlton Hotel. The difference was the location within the hotel, as the old wing had a cosier environment as compared to the conference rooms in the new wing. One of the directors had complained that it was as noisy as a “fish market” as there were many teenagers and youngsters running around along the corridors.

As I was one of the earliest to arrive, I managed to take a photo of the AGM while there was no one seated (see pic above). We were given an attendance slip stating out IC number and number of shares held, and there were not many shareholders attending the AGM this time although the number of shareholders had increased significantly (overheard this from one of the directors). This could probably be attributed to the Company’s rather aggressive corporate actions throughout FY 2011, which included three acquisitions for Engine Systems Division, a significant investment into an Australian-listed company called Neptune Marine Services; as well as the recently announced major acquisition of PSL and Pemac.

I shall sub-divide this AGM update into two separate parts as putting it all down in one post would be too lengthy, but I will not specifically state the questions that I had asked during the AGM. Since many of my questions did not receive direct responses (I merely deduced the replies from speaking and chatting with Management and steering them towards providing some clarity on various issues), I shall simply narrate the gist of what was mentioned and pass my own judgement accordingly. Also note that there are no hard and fast rules for getting answers at an AGM, even if you ask a direct question during the meeting proper, as Management are likely to want to take it “offline” (more on this in my AGM Part 2 coming up).

Summary of Bahrain Situation – Mr. Kuah Kok Kim

Mr. Kuah gave all shareholders an update on the situation in Bahrain before reading out the resolutions proper. After all, with the news and rumours swirling around Bahrain in the past few months, one cannot blame shareholders like myself for feeling jittery and concerned. He started off by saying that the situation in Bahrain had somewhat stabilized, and that the initial reports of death and destruction had been greatly exaggerated by the media. Of course, he did acknowledge that there were deaths and rioting, but maintained that these occurred mainly on major highways and in larger shopping malls. As the new facility was located in an industrial park far away from the troubles, there was no immediate danger to lives or property and business carried on as usual.

MTQ was, however, affected in the sense that everything got delayed and slowed down a lot due to the riots and trouble. Originally, the first 80% of the construction cum commissioning of the facility went on smoothly without a hitch. The final 20%, however, ran into delays due to the problems surfacing in the Middle East. Though everything has been resolved as of the date of the AGM, the two main delays came from the starting up of power at site (despite submission of applications to the Government, power was only turned on in July 2011), as well as the certifications required from the American Petroleum Institute (API) as many of MTQ’s principals and customers had been driven out of MTQ in the interim due to the violence, and were slow to return to the country.

In the meantime, MTQ focused on in-house training and therefore managed to limit the amount of start-up losses due to the delays; however on this point I feel that Management is trying to cushion the blow as there will be significant start-up losses due to the operational delay of the facility. The Bahrain facility will experience cash burn and unless things get up to speed soon, this may severely impact 1H FY 2012 financials.

A shareholder did ask Management on when break-even can be achieved for Bahrain, and the reply was “not too long”, which basically isn’t telling you much. What this means is simply that Management “expects” the new facility to be up and running soon and thus generating income, but the time frame for this would be uncertain as business reality is also uncertain! In fact, some positive news actually came out of this whole Middle Eastern debacle, in that Bahrain had stepped up their oil and gas exploration activities (this was an unexpected positive development which Management had not anticipated); by drilling more new wells and reworking old wells.

In addition, Saudi Arabia has also been pouring money into Bahrain in order to prop up its economy, due to the large proportion of Sunnis within Bahrain (Saudi Arabia is predominantly Sunni). US$10 billion has been pumped into Bahrain with the help of the Gulf Cooperation Council (GCC). These actions demonstrate that MTQ’s investment in Bahrain was sound, and that their many years of research had paid off as they were buffered from the worst effects of these adverse events.

On another note, Chairman Kuah also mentioned that transfer of duties from himself to Kuah Boon Wee the CEO was essentially complete, and that the new CEO has managed to cope with market demands as a result of the Deepwater Horizon disaster.

Cash and Debt Levels

My main concern with MTQ’s cash balances was that they seemed to be spending quite a lot of it, even as they were gearing up their Balance Sheet for their Bahrain expansion. With their purchase of 68,455,000 additional shares in NMS for about $3.34 million, as well as the $7.24 million cash outlay for the acquisition of PSL and Pemac, it seems that cash is being spent at a pretty alarming rate! Assuming a scrip dividend conversion rate of 45% of shareholders (as was the case for MTQ’s 2 cent/share interim dividend declared back in October 2010), another $950,000 will be paid out. Coupled with the additional $6.3 million capital commitments as disclosed in their Annual Report FY 2010/2011, this means a total outlay of about $17.8 million, out of their cash and bank balances of about $23.8 million as at March 31, 2011. Borrowings stood at $27.3 million as at March 31, 2011 as a result of borrowings to construct their new facility in Bahrain, including hiring new workers, shipping over new machinery and obtaining required certifications to commence business activities. Additional borrowings for Premier would come up to $16.9 million for a one-year loan, and total borrowings would go up to as high as $44.2 million by September 30, 2011.

From the above description, it is worrying to me whether MTQ can maintain a healthy cash balance and have sufficient cash flows for working capital and operational activities. When I quizzed Management on this, the following pointers were mentioned:-

1) MTQ has been generating healthy positive operating cash flow all these years, and the addition of Bahrain will contribute to this cash flow, but of course only after the initial start-up losses and cash burn have been overcome (through some time).

2) Interest rates on new loans now are at historic lows, and MTQ’s Term Loan 6 is denominated in USD which is, at the moment, depreciating against the SGD (which means each instalment payment will become cheaper for MTQ).

3) There is an intention to push some of the debt onto Premier’s books as Premier’s Balance Sheet is un-geared.

4) MTQ’s Engine Systems and Oilfield Engineering are both cash-flow positive, and Premier is also cash flow positive as well as profitable; hence there is not much worry that the finance costs cannot be sustained.

So, the above points do somewhat support Management’s assertion that cash levels would be sustained and that debt levels, though high, are still manageable. However, it would be extremely prudent for me as an enterprising investor (by Graham’s definition) to closely scrutinize the next set of financials for MTQ coming out for September 30, 2011 (1H FY 2012) to review if things are going as planned, or if something is drastically wrong.

Thus concludes Part 1 of the AGM highlights. Watch out for Part 2 soon which talks about NMS, acquisition of PSL and PEMAC as well as the Engine Systems Division.

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