MTQ – FY 2010 Analysis and Commentary Part 2

Part 2 of my analysis and review shall focus on MTQ’s business divisions, namely Oilfield Engineering and Engine Systems. I shall be comparing the proportion of revenues taken up by each division as well as delving into the net margins provided by each division. A year-on-year comparison will be made to judge if there has been any improvement in each division, and I will also comment on the overall business climate and environment for MTQ going forward, based on pertinent facts which I am aware of right now.

MTQ BUSINESS UNIT ANALYSIS

Revenue Breakdown – FY 2010 Vs FY 2009 (1H and 2H)


Looking at 1H FY 2010 revenue breakdown, Engine Systems and Oilfield Engineering roughly contributed equal proportions to total revenue, as compared to 1H FY 2009 when the ratio was more skewed towards Oilfield Engineering (at 55.9% versus 44.1%). This was due to the weakening of demand in the O&G sector as major players cut their E&P spending and caused a slump in oil prices (and hence demand for repair services which MTQ provides). On the other hand, revenues for Engine Systems remained fairly stable at around S$20 million, and were flat year-on-year, and this demonstrates steady demand for MTQES’ offerings in spite of the global financial crisis. From the first half analysis alone, it can be seen that despite Engine Systems being a much lower margin division as compared to Oilfield Engineering, it has a more stable revenue base and more sustained demand. Let’s move on to second half now (figures for 2H are derived by subtracting 1H figures from FY numbers).

For 2H FY 2010, the ratio of sales for both divisions remains constant as in 1H FY 2010, and this is due to the stronger sales in Engine Systems compared to 2H FY 2009 which helps to boost the revenue figure amid a slump for Oilfield Engineering. For 2H FY 2009, Oilfield Engineering took up nearly two-thirds of revenues (66.6%) while Engine Systems took up just one-third (33.4%). It should be noted that revenues for Oilfield Engineering recovered slightly in 2H FY 2010 compared to 1H FY 2010 (from S$19.7 million to S$20.6 million), while for Engine Systems revenue improved to S$21 million from 1H FY 2010’s S$20 million, presumably due to the scaling up of offerings by MTQES. If this division’s expansion gains more traction in FY 2011, we could potentially see a much higher revenue contribution in absolute terms, and in terms of proportion it could keep pace with the growth in Oilfield Engineering division (due to the recovery in the O&G sector). Of course, it can be argued that revenue growth is useless without corresponding margin growth, which is what I will tackle in the next section of this analysis.

For FY 2010, the ratio remains constant as per 1H and 2H of FY 2010, while for FY 2009 it can be seen that Oilfield Engineering takes up the lion’s share of revenues. Taken in context, this means that Engine Systems’ revenues are catching up with Oilfield Engineering, and will surpass this division in time to come if not for the planned Bahrain expansion. The last financial year has seen MTQES building up their capabilities by extending their reach into Northern Territory in Australia (and increasing their distribution network), as well as scoring a coup by partnering with Bosch to create Bosch Superstores for automotive parts. I envisage that revenues for Engine Systems will continue to grow and probably will surge past Oilfield Engineering, as Oilfield division’s recovery hinges on the global economic recovery and E&P spending by oil majors. Until the Bahrain facility is fully operational by FY 2010, I do not expect to see a big jump in revenues from Oilfield Engineering.

Margin Analysis by Division


Looking at the revenues comparison, it is clear that Oilfield Engineering suffered a slump for FY 2010, with revenues falling 27% to S$40.3 million. Engine Systems picked up steam, though, with revenues increasing 17.5% to S$41.1 million. This can be attributed to the Bosch Superstore deal which MTQES signed, and which commenced on November 1, 2009. Thus, the jump we see here represents just 5 months of increased sales. If we include the additional contribution over the full 12 months (for FY 2011), then the revenue should increase even more. Recall too that MTQES had purchased Premier Fuel sometime in March 2010, so the additional contribution should flow through beginning April 2010 (i.e. FY 2011). Overall, revenues fell by 9.3% which was reflective of the depressed economic situation due to the global financial crisis. Businesses regularly suffer some dip in revenues and earnings due to economic cycles, but as long as they remain profitable and are able to make use of the slump to grow their business and consolidate their positions, they will emerge much stronger from the crisis.

For segment net profit, Oilfield Engineering’s net profit fell 30.9%, greater than the fall in revenues of 27.2%. This indicated that costs had remained fixed and were unable to be reduced even in the face of decreased sales. However, since the difference is not very great (3.7 percentage points), I am inclined to conclude that net profit had fallen in line with sales. Of course, more evidence of this has to be seen from tracking net profit increase to sales increase in future periods. For Engine Systems, the jump in net profit as a result of economies of scale (from the Bosch Superstores) is apparent as revenue increased 17.5% while net profit increased 171%. This reflected better margins as Mr. Kuah did mention that incremental costs to stock up existing MTQES stores were minimal, while the tie-up with Bosch would significantly increase both their customer base as well as sales volume. The 2H FY 2010 figures would have justified his statement (but unfortunately, there was no breakdown given between 1H and 2H in the financial statements released on SGXNet) as sales value ramped up while costs were adequately controlled.

I had written in my analysis of purchase for MTQ that Engine Systems division had traditionally suffered from very low net margins, as was apparent from my 5-year analysis of the division’s margins. Part of the reason can be attributed to the loss-making Indonesian unit, which has since been liquidated. Re-structuring of the division also took some time and now, with better economies of scale kicking in from the Bosch tie-up, I can begin to see net margins creeping up, though they are still at pretty dismal levels. Net margins for Engine Systems increased from 1.4% in FY 2009 to 3.2% in FY 2010, which was a very respectable improvement. Moving forward, it remains to be seen if net margins can be further improved past the 5% level, as the purchase of Premier Fuel was only completed some time in March 2010. If what Mr. Kuah projected back in October 2009 was accurate, the increase in customers and cross-selling of MTQES’ own products combined with Bosch can allow for better sales figures, while keeping costs controlled. I believe that for this division, a net margin of 10% or more would be decent, and not the margins existing at current levels.

Part 3 of this analysis shall examine the prospects of each division, based on best available information; as well as comment on the Bahrain expansion and the risks involved, as well as the planned change in the capital structure of the Group (i.e. taking on more debt) in order to finance this expansion.