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NRA Capital Pte Ltd

Written by: NRA Team

Thursday 9 Jul 2015

XMH Holdings - FY04/15 Analyst briefing

Full year performance for XMH shows strength of subsidiary acquisitions

Positive revenue contributions from acquisitions offset underperformance by XMH core business

Marine power and engine solutions provider XMH Holdings (XMH) held an analyst briefing to discuss its FY04/15 FYE results. Revenue for the group fell 13.0% yoy from S$105.2m to S$91.5m, but gross profits increased yoy by 2.5% to S$28.0m from S$27.3m due to changes in the product mix.  Net income went down yoy by 11.4% to S$5.4m from S$6.1m due to increases in distribution and administration expenses as operating costs of the subsidiaries are recognized.

The main point of note for XMH in FY04/15 is that XMH registered a full year of revenue contributions from land-oriented generator manufacturer Mech-Power Generation (MPG) which was acquired in 2Q04/14 and registered additional contributions from switchboard and control systems solutions provider Z-Power Automation (ZPA) which was acquired in 4Q04/15. These acquisitions have provided revenue upside for XMH that provide the diversification necessary for a traditionally marine-oriented company to maintain revenue growth in a period where the maritime sector faces significant headwinds.

Key takeaways                                    

-          Based on the segmental breakdown it is clear that the slowdown in the marine and offshore market has negatively affected the core XMH business unit, which focuses on marine generator sets. We attribute this largely to the slowdown in the Indonesian market where the expected ramping up of Indonesian shipbuilding has not occurred. Contributions from Vietnam are expected to continue their growth momentum, which would offset the underperforming Indonesia market. Nevertheless, we note that the delay of orders and deferments of collections from customers as reported by XMH point to continued pressures facing the core XMH unit. It remains to be seen how strongly the ZPA acquisition will contribute to the XMH group as a whole, with the late 4Q04/15 acquisition providing a limited time to observe the amount of contributions that would have been realized.

-          On the other hand, MPG continued posting positive results. MPG contributed S$43.0m in revenue for FY15, a full 47.0% of the whole revenue for the XMH group. Market demand for large land-based generator sets has proven strong, with MPG announcing two new contracts worth S$23.1m in June 2015. Along with residual contract value from the June 2014 contracts that provide revenue visibility to January 2016, we find the order visibility to be a major positive point for XMH. The positive performance of MPG was the reason for a higher administrative expense outlay for MPG where one-time bonuses were distributed to recognize the positive performance of MPG staff.

-          Cost rationalization for the XMH group will occur in 2H04/16 as ZPA, XMH and MPG all move into the facility at Tuas. Given the different businesses and the fact that MPG and ZPA are lean operations, we do not anticipate greater cost rationalization in terms of administrative costs or distribution and cost of goods consolidation. The immediate upside will be a decrease in net rental expenses, and synergistic benefits from greater sales integration which may increase cross-sales revenue. 

Our view

Indonesian shipbuilding is unlikely to register significant upside in the near term, limiting the opportunities for which XMH can increase its business on that front. The main upside potential for XMH was to come from the requirement that oil and gas within Indonesia would have required oil transportation and exploration vessels to also comply with the cabotage flag rules, a modification from the original legislation that came into effect in 2011. The collapse of oil prices in 2H14 has made the ending of exemptions moot as actual demand for new oil transportation vessels fell in accordance with the oil price. Both these factors worked in concert to depress the performance for XMH across FY04/15, due to a lack of realization of upside potential and customer order and payment delays. In the absence of a recovery in oil prices, the upside potential for XMH from Indonesia is limited.

As land based power generation requirements start to increase, we anticipate that MPG will continue to be the star performer for the XMH group. The gradual increase in Singapore’s push to be a regional data centre will increase the size and complexity of standby power units for industrial scale facilities, while the increasing reputation that MPG is accruing thanks to its positive performance allows MPG opportunities to compete in geographies beyond Singapore.

XMH has been fortuitous in its acquisition of MPG, in that it allowed XMH to diversify away from the marine and offshore sector just as the collapse in oil prices removed the main driver of ship construction over the past few years. The strength of MPG has been insufficient to make up for the fall in revenues that XMH core business endured, but positive operating margins and a historically conservative approach to debts has allowed XMH a comfortable financial position to ride out the downturn in the shipping markets

This conservative approach has led XMH to reduce its dividend payout to S$0.8 cents per share, a 20% reduction from the S$1 cent per share ordinary dividend payout made in FY2014, not including the S$0.2 cents per share special dividend payout made in FY2014 as well. This results in a dividend payout ratio of 67.8% in FY04/15 compared with the 82.8% dividend payout ratio for FY04/14.

On balance we find that the diversification of XMH and accretive acquisitions are the main points in favour of the company. XMH currently trades at S$0.20, which is 16.2x annual PER, close to its 3 year average of 16.5x PER. We find XMH to be fully valued at its current price, given the lack of positive sentiments for Indonesian shipbuilding in the near term which will pressure XMH further. On the other hand, further contract wins and greater visibility regarding the synergistic strength of the ZPA acquisition could lead to outsize earnings contributions from those divisions over FY04/16, overcoming the troubles facing XMH and allowing XMH to increase its dividend payout to shareholders in turn. 

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