Current Price S$0.34
Fair Value S$0.45
New acquisition offsets weak Indonesian sales
Earnings below expectations. 2Q14 net profit of S$2.0m was 40% below our expectations, mainly due to lower-than-expected revenues from its distribution business segment and higher-than-expected SG&A expenses.
Lower forecasts and fair value but maintain Overweight. Given the lower-than-expected earnings, we slightly revise our full year forecast 5% lower due to higher operating cost but keep FY15-16 relatively unchanged.
As a result, our fair value is changed from 49 cts to 45 cts, still pegged to 12x FY14 PER. XMH only recognized two months of Mech-Power Generator Group’s (MPG) financials in 2Q13, so we should see a more meaningful contribution from 3Q14 onwards. Potential catalyst could include another acquisition to widen its production range. We continue to like the group's stable cash generating business and consistent dividend pay-out. With a 33% upside to our revised fair value and decent 2.8% dividend yield at its current price, we maintain our Overweight recommendation.
MPG’s order book already supplementing XMH’s order book. XMH’s order book remains a healthy at S$58m, despite it dropping from S$70m in 1Q14, due to the weak customer sentiment in Indonesia delaying purchases as a result of the weak Rupiah over the past few months. MPG however has seen its order book increase from S$40m in 1Q14 to S$55m in 2Q14, with more than 50% of it to be recognized in FY14.
Diversification of risks in its expansion plans. Given the weak sentiment in Indonesia due to the weak Rupiah, MPG has shown that it is already providing diversification from XMH’s concentration in the Indonesian market by offsetting the weaker top line performance of its distribution and aftersales.
Revenues increased 1.2% yoy to S$27.1m mainly due to the new contribution of S$5.1m from MPG offset by decreased revenue from its distribution and after-sales business segment. Gross profit margins increased 1% pts due to sales of higher margin products from the distribution and after-sales business.
Balance sheet remains strong. The group generated negative free cash flow of S$0.7m for 2Q14 due to higher working capital requirement. Together with the consolidation of S$15.5m bank borrowings from MPG, its net cash decreased from S$45.5m as at end July-13 to S$24.5m as at end Oct-13.
Publish date: 20/12/13