MTQ Corp - RHB Invest 2015-11-02: Cost Cuts Sharply Narrow Losses

SGinvestors.io

MTQ CORPORATION LIMITED M05.SI 

MTQ Corp (MTQ SP) - Cost Cuts Sharply Narrow Losses 

• MTQ’s 2QFY16 was almost back to breakeven as a result of successful cost cutting. 
• Maintain NEUTRAL with SGD0.59 TP (from SGD0.69, 6.2% upside) as we trim our P/B multiple to 0.75x (from 0.9x) due to the general sector derating. 
• Margins were stable QoQ, but the dividend was omitted this half-year. 
• We continue to like the company for its high cashflows, but the difficult operating environment continues to weigh on profitability and market sentiment. 

 Heading back towards profitability. 

• MTQ narrowed its 2QFY16 loss to SGD0.5m from a SGD2.3m loss in 1QFY16 even though revenue fell 4% QoQ. This was managed through staff and core operating costs falling 9% and 15% respectively QoQ, an admirable performance. 
• Our forecasts are adjusted from a SGD6.9m loss estimate to a SGD3.3m loss position for the current year, and we expect the full-year impact of the ongoing cost cuts to bring MTQ back into profitability next year. 

 Margins appear to be stabilizing. 

• After four consecutive quarters of gross margin declines, this is the first quarter where it has remained constant QoQ. The EBITDA margin has bounced up to 5.2% from 2.6% in 1QFY16, due entirely to lower overheads. 

 Balance sheet strong but dividend omitted for conservatism. 

• Though we question management’s decision to omit the half-yearly dividend, as the balance sheet remains strong at only 0.13x net gearing and positive operating cashflows, we understand their preference for conservatism. 
• Management did not rule out the option to “make good” on it in the final dividend, subject to the operating environment showing significant improvement. 

 Keep this stock on your radar. 

• The difficult operating environment has hit services players hard, but MTQ’s management has begun reaping the fruits of cost-cutting labour. The stock appears fairly-valued today based on the general weak market sentiment, though a positive thesis could be made on the basis of its strong cash flows. 
• A discount to book is currently warranted due to ROE having fallen below the cost of equity (COE). 
• Maintain Neutral with SGD0.59 TP pegged to 0.75x FY16F P/B.

Lee Yue Jer CFA RHB Research | http://www.rhbinvest.com.sg/ 2015-11-02

RHB Research SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.59 Down 0.69