CIMB Research 2015-07-29: MTQ Corporation Ltd - A wiped out quarter. Maintain HOLD.

A wiped out quarter 

  • MTQ incurred a core net loss of S$2.1m (-151% yoy) in 1Q16 vs. ours and consensus’ profit expectations. 
  • The red ink was due to severe margin contraction. 
  • Gross margins shrank to 26% (4QFY15: 28.8%; 1QFY15: 34%). 
  • We now expect a small loss for FY16. 
  • We also reduce our FY17-18 EPS by 39-45% on lower revenue and margins. 
  • With share price at a low, we maintain Hold with a lower target price (S$0.69, prev S$0.77), still at 1x CY15 P/NTA (its trough valuation).
  • We would revisit the stock upon stronger-than-expected earnings. 

Singapore very weak, Middle East holding up 

  • MTQ’s 1QFY16 revenue dropped 22% yoy to S$60m due mainly to low level of activities for the Singapore oilfield engineering business. 
  • Neptune’s and Engine Systems’ revenues inched downwards. 
  • Part of their weakness was translated from the weak Aussie dollar. 
  • Meanwhile, the Bahrain facility continued to see a healthy level of activity that generated higher revenue yoy. 
  • We estimate that oilfield engineering (Singapore’s and Bahrain’s facilities combined) contributed c.30% of 1Q16 revenue, while Neptune made up c.55% and Engine Systems c.15%. 

Fierce price competition led to margin contraction 

  • Gross margins were eroded to 26% (4QFY15: 28.8%; 1QFY15: 34%) due to fierce price competition for oilfield engineering work. 
  • Since 2H15, gross margins have declined sequentially and we expect the weakness to persist as management fights for revenue opportunities. 
  • The group rationalised staff costs by 16% yoy but the cost savings (S$2m) were insufficient to offset the lower activity level. 
  • MTQ's saving grace is its secure financial position (0.1x net gearing) which should enable it to ride out the downturn. 
  • Despite recording a loss, the group managed to generate S$3.4m operating cash inflow. 

Expecting small losses for FY16 

  • We expect revenue and margin weakness to persist and now project a small loss for FY16. 
  • Given MTQ’s strong cash position (S$41.2m cash as at end-1Q16), we anticipate that the group should be able to continue paying out dividends, even if earnings prove to be a black hole for FY16. 
  • We forecast a cash DPS of 2Scts (-50% yoy) which would construe S$3.1m outflow. 
  • We project MTQ to be able to maintain its cash balances at S$36.4m at end-FY16.

(YEO Zhi Bin)