RHB Research 2015-07-29: MTQ Corporation Ltd - Challenging Environment Persists. Maintain NEUTRAL.

Challenging Environment Persists

  • MTQ swung into a surprise SGD2.3m loss in 1QFY16 as oilfield engineering operations in Singapore weakened. 
  • Maintain NEUTRAL, with a SGD0.69 TP (from SGD0.79, 3% downside). 
  • Activity was more resilient for the engine systems division and at Neptune in Australia, but their revenue contributions were diminished by a weaker AUD. 
  • Management was candid about the difficult operating environment. 

 Slower times are here. 

  • We estimate that revenues for the Singapore side of MTQ’s oilfield engineering business fell c.20% YoY, with some mitigation from a still-growing Bahrain. 
  • Gross margins for the group fell to 26% in 1QFY16 (Mar) from 28.8% in 4QFY15 as competitive pricing and lower utilisation at the Singapore facilities took their toll. 
  • Management reported that revenues were just slightly down at the Australian businesses, ie engine systems and Neptune Marine Services (Neptune) in AUD terms, but these fell after translation on the weakening AUD. 
  • Margins for the subsea business only fell in the c.5ppts range, which we deem respectable given the current challenging operating environment. 

 Still generating cash. 

  • Despite the loss, MTQ still generated SGD3.4m in operating cash flows. 
  • Capex outflows were SGD4m for the quarter due to staggered payments for some remotely-operated vehicles, and these should fall off quickly in later quarters. 
  • Overall, we still expect the group to generate positive free cash flow in this and coming years. 

 Targeting revenue opportunities. 

  • We appreciate management being candid in describing the challenging operating environment, saying that the group “cannot cost-cut its way out” to a recovery, but needed to “cast a wider net given MTQ’s capabilities”. 
  • To that end, management has succeeded in growing Neptune’s subsea business to the Middle East, and sees opportunities in downstream maintenance services, where refineries’ margins have expanded due to the lower feedstock prices. 
  • We have trimmed our revenue forecasts by 15% and gross margins by c.4ppts, and now expect FY16 to register a loss. 
  • Our TP is lowered to SGD0.69 (from SGD0.79) based on 0.9x FY16F P/BV. 
  • Key risks continue to be lower revenues and operating margins.

(Lee Yue Jer, CFA)

Source: http://www.rhbgroup.com/