Saturday, November 26, 2011

MTQ – 1H FY 2012 Analysis Part 2

Part 2 of this analysis will focus more on the qualitative aspects of MTQ – the sections which many analysts find tough to quantify, but which I feel is also extremely important for any analysis to be complete. Note though that these observations were made from a combination of interactions with Management, articles/interviews with The Edge Singapore and my own opinions and conclusions drawn out from the facts and data.

Oilfield Engineering – Bahrain Operations

As early as Jan 2010, MTQ had already announced their plans to expand into the Kingdom of Bahrain, and steps and processes had been put in place to gradually ease their way into the Middle Eastern country, from the purchase of equipment to the hiring of staff and the engagement of a main contractor to carry out construction of the Facility for their Phase I expansion. At the time, very good reasons were provided (which, I should add, are still relevant today) and it seemed all smooth-sailing with financing being locked in at good rates and building costs being at a low because of the low construction pipeline at the time. However, with any business, any plans for expansion into a new territory are always fraught with risks; and these came in the form of riots stemming from the “Arab Spring” movement in the Middle East which saw many countries having their leaders toppled. Some coups were peaceful (Tunisia) while others were savage and bloody (Libya), and for Bahrain it was somewhere in between with riots and deaths and destruction of property but nowhere on the scale of a civil war or anarchy.

The rapid unravelling of events took Management by surprise and as a result, electricity supply was hard to come by and was only restored in recent months; while many oil and gas principals and vendors had fled the country due to the instability. Thus, it was only recently in October 2011 that MTQ managed to get its certifications and specifications from API (American Institute of Petroleum) and thus commence business. So the entire 1H 2012 did not see any contributions from Bahrain, but instead took the full brunt of start-up losses from the depreciation of machinery and for staff salaries for new hires and training required to get them up to speed. 2H 2012 should see healthy contribution from Bahrain, though the level of business activity still remains a mystery as MTQ does have several competitors in the Middle East. It is indeed good news that Kuah Kok Kim sees good potential and healthy enquiries for MTQ’s services and product offerings, and the BP Deepwater Horizon disaster also had a positive impact on companies such as MTQ as this meant more stringent checks and frequent repairs required for equipment such as BOP (Blowout Preventers) used on oil rigs in order to prevent accidents of a similar nature and scale.

The new facility is 430,000 square feet and is more than twice the size of MTQ’s Singapore Facility at Pandan Loop. With oil production expecting to rise as a result of spending by UAE and Bahrain’s Government, MTQ can be assured of continued business in the medium-term. Assuming full capacity utilization at their current Singapore facility, and using simple proportion, we should expect MTQ’s Oilfield Engineering revenues to more than double once the Bahrain facility is chugging along at full utilization as well. As to whether gross margins can be maintained at the current high levels, that is open to question; but we have already witnessed some erosion of gross margins due to the introduction of PSL into the picture, though whether this will eventually sort itself out due to corporate integration and increased efficiencies is unknown at this point in time. Suffice to say that efforts are indeed underway to ensure smooth integration and to ensure good cross-selling opportunities. This should definitely come under close scrutiny when the 2H 2012 results are released.

Oilfield Engineering – PSL

There is a little overlap in terms of discussing PSL as I had already mentioned PSL in bits and pieces under the Bahrain section, but nevertheless I shall attempt to elaborate more here. MTQ announced the acquisition of 100% of PSL on July 6, 2011, and the final purchase consideration is US$21.9 million. Of this amount, US$13.51 million is financed by additional bank borrowings (which explains the sharp increase in the gearing ratio) while the remainder was funded by internal cash reserves.

The rationale for the acquisition was that PSL offered a complementary range of products and services which would enhance MTQ’s total offering to customers. PSL also had its own set of customers and acquiring the Company would mean that MTQ could broaden and expand its customer base, thus allowing for more opportunities for bundling of products/services and cross-selling. In addition, PSL also has a machining and fabrication business called PEMAC which will add to MTQ’s capabilities and expand the equipment range which MTQ can repair. Moreover, PSL also holds API certificates which will boost MTQ’s Oilfield Engineering capabilities. As mentioned previously in a blog post about the AGM, MTQ managed to acquite PSL because its parent wished to divest it as it was not forming a core part of the previous parent’s operations, which were mainly based in North America.

According to the article from The Edge Singapore, PSL contributed about $10 million to topline and this was only about two months of revenue and profit contribution, so the potential for higher revenues and earnings is very high. But PSL’s business has lower gross margins as compared to MTQ’s main oilfield engineering business but Mr. Kuah intends to improve them by streamlining its business and selling mud coolers to MTQ’s network of clients. As Bahrain takes off, he is also optimistic that PSL can contribute more and create greater value and synergy for the Group.

Engine Systems Division

Not much was mentioned about Engine Systems division, and I guess that is a blessing in disguise because in the prior financial year, there were already three acquisitions relating to this division which sought to expand their reach in Australia. Rather than chase after acquisitions which may drain cash and make the division look like a serial acquirer, it is better to slow down to integrate these acquisitions into the main business to ensure synergies and alignment of sales strategies, product lines and processes/procedures. It was mentioned that operating profits had increased for Engine Systems, but no detailed breakdown was given with regards to the operating margin; and I am also in the dark about how the three acquisitions are performing (i.e. loss-making, cash-flow positive?). However, it is gratifying to know that revenues are, at least, increasing, and the last communication I had with Mr. Dominic Siu at the AGM told me that the Group will be working to increase the margins for this division (known historically to be rather dismal).

Perhaps I can provide more updates on this division once the annual newsletter arrives from MTQ, but I can make no promises on this.

Investment in Neptune Marine Services (NMS)

MTQ had announced an investment of $12.93 million in NMS back on March 4, 2011 by purchasing 200 million shares in the Company (in a restructuring exercise) at A$0.05 per share. Over the course of 11 trading days, MTQ accumulated another 68.455 million shares in NMS, for a total stake of 268.455 million shares (about 15% of the Company), lowering their average cost from A$0.05 to A$0.0467 cents per share. Total cost of investment comes up to about A$12.5 million after the open-market purchases. As the time of writing, NMS traded at A$0.031 cents/share.

Clearly, NMS is intended to be a strategic, long-term investment for MTQ, as mentioned by CEO Mr. Kuah Boon Wee back during the AGM. The Company does subsea work and it has proprietary technology called NEPSYS which it can use to market itself not just in Australia but also South-East Asia where its focus will be. The Company has just released its Annual Report for the financial year ended June 30, 2011. In it, it outlines the corporate restructuring which had taken place and how it has taken efforts to not just de-gear the Balance Sheet, but to divest off unprofitable assets and divisions in order to beef up their cash reserves and to realign their corporate strategy for sustained growth. Interested readers may download their AR at

More importantly, the Company has stated its strategy to grow the business along three paths:-

1) Organic growth and growth of service lines in established geographic regions

2) Integration of services and focus on creating awareness of the “Total Service Solutions” provided by Neptune

3) Developing strategic relationships with key partners

It will be interesting and informative to follow the progress and fortunes of the Company, as Mr. Kuah Boon Wee had also been elected as an independent director of NMS. Of course, this investment cannot be directly compared to MTQ’s previous successful investment in RCR Tomlinson, but I would assume that with his father’s wise counsel with regards to investments in potential turn-arounds, Kuah Boon Wee would have combined it with his own years of experience and made an informed decision. Since it would not be possible to assess the financial impact of this investment in the short-term, it would be better to check back again next year once NMS releases its 1H FY 2012 results in late February 2012.

Hot from the oven: NMS had just announced on November 16, 2011 that it had clinched a contract for the provision of geophysical and geotechnical surveys for the Equus Gas Fields Development Project, and that they had formed an alliance with Greatship Subsea Solutions Australia Pty Ltd to complete the project. The contract value is estimated at A$14.5 million and NMS’ share will be about A$7.35 million, and is expected to commence in late November 2011 and last for 75 days. So apparently, no. 3 on the list is already being rolled out as this is one of the strategic alliances which NMS hopes to hammer down to forge long-term partnerships in order to grow their recurrent revenue stream.


MTQ can rightly be classified as more of a growth company than a yield play, as it has aggressively leveraged itself to expand its business, not only beyond Singapore and into Bahrain, but also through acquisitions (PSL and NMS) which are supposed to be earnings and cash-flow accretive and which will add long-term value to shareholders. Father and son had both commented that MTQ had been too conservative in the past, and now a little leverage would be good to propel the Group to another level. Of course, risks are definitely present as the Group operates in the current environmental of economic uncertainty and turmoil; but with proper stewardship and good control of cash, the Group may yet sail out from the storm unscathed and emerge stronger.


setan said...

Hi MW,

Hope you could enlighten me on XIRR measurement.

When you stated that you achieve a -4.5% XIRR, what do you mean?

Appreciate you could help me to understand. Thanks.

Musicwhiz said...

Hi Setan,

It means that my return (annualized) for 2011 thus far (inclusive of all purchases, sales and dividends) is a negative -4.5%. But overall, the portfolio's market value is still higher than its cost.