Target Price: SGD0.50
Growth Slows As Indonesians Hold Their Breath
XMH posted weaker 2Q14 results as its Indonesian customers delayed their receipt of orders as the IDR depreciated. Margins and overheads growth were in line, but the topline was flat, leading to a 44% y-o-y fall in profits. The consolidation of MPG Group will bolster earnings growth, although the actual pickup should come in FY15F. As XMH remains a fundamentally strong company, we maintain our BUY call, with a lower SGD0.50 TP.
Indonesian opt to take delivery later. The revenue disappointment was partly due to Indonesian customers delaying receipt of orders owing to the depreciating rupiah, as well as low recognitions from Mech Power Group (MPG) in the two months of consolidation. Gross profit actually grew 6% y-o-y as the company delivered higher-margin products. The outstanding group orderbook of SGD113m provides good revenue visibility.
Overheads rise on change in bonus provisions method and consolidation of MPG costs. The increase in overheads were in line with estimates, partly caused by the recognition of bonus provisions during the year (from 1Q14 onwards) instead of at year-end, and in part due to consolidation of the overheads of MPG.
MPG ramps up on higher-margin contracts. We expect MPG’s contribution to increase in the coming quarters as it delivers its contracts this quarter. Its accounting policy is recognize-on-delivery, which XMH management is looking to change to percentage-of-completion.
Cutting estimates by 17-20%. We lower our FY14-15F estimates by 17%/20% as we factor in the delays in Indonesian order deliveries. These could rebound if the rupiah appreciates or stops depreciating.
Strong business with high returns, attractive yield. Maintain BUY with lower SGD0.50 TP. XMH still provides a healthy 3.8-4.4% forward yield and a 25% ROE without gearing. Its SGD33m in net cash allows it to continue to executing its growth strategy via acquisitions while waiting for its Tuas Bay facility to be built. Our TP, pegged to 14x blended FY14/15F P/E, categorizes XMH as a growth stock with yield support.
Publish date: 20/12/13