Friday, August 26, 2011

MTQ – FY 2011 AGM Highlights Part 2

Part 2 of the MTQ AGM Highlights will touch on Neptune Marine Services, Oilfield Engineering’s recent acquisition of PSL and PEMAC, as well as elaborate on Engine Systems Division.

Neptune Marine Services (NMS)

Naturally, quite a few pointed questions were asked about the recent NMS acquisition, as the Group had pumped in a substantial sum of money into this investment. MTQ was even buying up more shares from the open market recently in order to reduce their cost of investment further from A$0.05 to A$0.0467; but the recent market turmoil has actually pushed down NMS’ share price to as low as A$0.026. No questions were asked during the AGM proper but it was after the meeting that one or two shareholders (myself included) approached Mr. Kuah Boon Wee (KBW) to find out more about NMS.

One shareholder’s concern was that NMS was a micro-cap stock (below 10 AUD cents) and therefore it would be very difficult for valuations to rise and hence the share price would stay depressed for extended periods of time. KBW acknowledged this but maintained that the reason for MTQ investing in NMS was that the restructuring left them with a very clean Balance Sheet and that the divestments meant that cash would be raised and the business model would be very much more streamlined as compared to previously (before the rights issue). KBW was also questioned on how experienced the new CEO Mr. Robin King was in managing such a company, and the reply was that he was sufficiently competent. Another query was – why would MTQ invest in NMS unless synergies were to be obtained, and do the businesses of MTQ and NMS overlap in any way? KBW’s reply was that NMS’ business was subsea, and MTQ was also dealing with subsea business as it was repairing equipment relating to subsea operations; hence there was overlap and both companies are essentially serving the same industry.

My concern was that NMS would take significant time to turn around as the divestments did not ensure that the core business would be profitable and cash-flow positive. KBW mentioned that the current financial year ended June 30, 2011 would look terrible due to the rights issue and significant write-offs, while the next financial year ended June 30, 2012 would look similarly disastrous because of the various other divestments of non-core assets and streamlining of the business. I took that to mean that the business of NMS would only “stabilize” in the financial year ended June 30, 2013; and this also implied that MTQ would take a long-term stance on NMS in that they had the patience to sit through the restructuring to ensure their investment bore fruit. Note also that in the interim, NMS would not be paying a dividend at all, thus unlike Hai Leck, MTQ would not enjoy any yield at all for their waiting.

It will be interesting to continue to monitor the business of NMS and their periodic announcements on ASX to follow the progress of the restructuring, and to see if they eventually bear fruit. Thus far, Mr. Market has been less than kind to NMS and has accorded it a very low valuation; time will tell if Mr. Market was right, or if he had been overly pessimistic.

Oilfield Engineering Division – Acquisition of PSL and PEMAC

Besides the issue of Bahrain, the other major talking point about Oilfield Engineering was the recent announcement of Premier Sea and Land (PSL) and its workshop division called PEMAC. I broached this topic with KBW as well and he mentioned that it was acquired cheaply at about 4.7x PER and 1.29x P/B (I provided him with the numbers which he agreed with). He also mentioned that the business was cyclical in the sense that last year’s earnings for PSL of US$4.1 million was considered one of its “lowest” points, with other years registering much higher net profit. Therefore, it would make it look as if MTQ had capitalized on this temporary blip to acquire this company cheaply.

When quizzed by another shareholder on why the parent would want to divest PSL when it was profitable and had an unleveraged Balance Sheet, the reply was that the parent was a US-based company with operations and revenue derived from North America; while PSL was the only Asian arm with most of its revenue derived from South-East Asia. Hence, there was a mis-match and the parent considered divesting it to focus more on its core regions. KBW also mentioned that MTQ had been aware of PSL for a long time as a competitor and was simply waiting for a good and ripe opportunity to come along to acquire the Company; thus killing two birds with one stone – integrating PSL’s business and product range with MTQ’s, and also eliminating (i.e. buying out) the competition!

I was also asking the CFO about PSL’s half-year performance ended June 30, 2011 (it had a December 31 year-end), but he declined to give exact figures; only saying that it was “better than budgeted”. I guess there was a certain amount of sensitivity in revealing such numbers as PSL is not a listed company; therefore there is no onus for disclosure of such information. As long as PSL is doing well, I have no worries about not knowing the exact numbers; in fact all I wish is that Management know how to integrate it well with MTQ’s core Oilfield Engineering Division and in time to come, produce positive synergies and tangible benefits for the Division.

Engine Systems Division – Acquisitions and Margins

The final aspect to ask about was the Engine Systems Division, which was rather neglected during the course of the meeting as no one was particularly interested to ask about it. Most attention was (of course) directed at Bahrain, PSL and even NMS and I guess most shareholders assumed that Engine Systems Division would just “chug” along like a well-oiled engine (no pun intended). My concern was whether the division’s margins were improving and the CFO assured me that they were working on this. My important question to them was whether the division generated positive cash flows and the reply was in the affirmative.

I also expressed concern that one of the recent acquisitions (three of them as detailed in the AR FY 2011) was loss-making, while the other two were acquired too close to the end of the financial year for any positive impact to be seen. The CFO took a different tack when answering this question – he mentioned that for Engine Systems, scale and coverage were very important. In fact, MTQES was the only Company in Australia which had nation-wide coverage in terms of branch locations; and the acquisitions had helped to make this a reality. With this enlarged coverage, MTQES would be more effective in engaging customers all over Australia, and I took it to mean that this would be positive for the Division over the medium-term (and that the effects would not be immediately apparent).

I had to admit that Engine Systems had come quite a long way since I looked at it three years ago, and even though margins were still thin, they had improved quite a bit since then and I believe it can be attributed to the Management Team’s focus on the Bosch partnership, expanding its range of products such as turbochargers, as well as extending its reach so that it could more effectively serve its customers. These measures take time to show results and therefore, I am willing to be a bystander and observe this Division further before making more conclusions.

This concludes my AGM highlights for MTQ, and I will probably not blog about MTQ for quite a while until it releases its 1H FY 2012 results in late October 2012. Meanwhile, the issue price for the scrip dividend has been announced at 82 cents/share, and my decision would be to take up 100% scrip as I believe in the growth prospects for MTQ.

Note: For a good write-up on MTQ’s AGM, please also refer to this article by Next Insight.

No comments: