Nordic Group Limited - Phillip Securities 2016-08-17: Outstanding performance amidst dismal atmosphere

NORDIC GROUP LIMITED MR7.SI

Nordic Group Limited - Outstanding performance amidst dismal atmosphere

Nordic Group Limited (Nordic) announced their 1H16 results on 16th Aug-16. We attended the results briefing, and here are the key takeaways.
We are Positive on Nordic’s ongoing diversification of business expansion and its prudent risk control. These favorable measures not only allowed the group to tide through the deteriorated oil and gas sector but also ameliorated overall profitability.

As of Jul- 16, Nordic’s outstanding order book dropped to approximately S$26.6mn from SG$39.2mn at end FY15, excluding maintenance contracts. This order book will deliver progressive revenue streams in the next 2 years for the Group. Furthermore, management expects maintenance services to generate SG$25mn per annum. Meanwhile, the overall manpower increased by roughly 20% YTD to 1,200. With the application of the cross-training program, the Group managed to control the inflated labor cost, for the administrative expenses only mildly increased by 8% y-o-y in 1H16.
However, suffering from the weakening demand upstream, the orders for automation system declined correspondingly. With the contagion effect from the previous corporate failure still overhanging within the industry, these orders are susceptible to cancelation, deferment, or variations. Given the scenario, management has been prudently scrutinising customers and selectively accepting orders. Furthermore, they also actively negotiate with customers to restructure the project payment methods to guarantee quality of receivables.

Nordic is diversifying to provide PLC-based automation solutions beyond the oil and gas sector (O&G). As of Jun- 16, the deployment of these systems extended to airport, hospital, and warehouse projects.
Since the skillsets are transferrable, Nordic managed to apply them to other sectors. Though the c.25% gross margins of these general industries will be lower than the c.30% of the O&G sector, it broadens the business coverage as well as keeps the business running in such a lackluster environment.
Management guided that these coverage will contribute 10% of the total revenue within one year.

Nordic has been seeking potential targets to level up its scale and coverage. Management shared two guidelines for M&A activities: One is that the search has to be within O&G sector, and the other one is to target those companies with same client base as the Group’s current portfolio. This allows the Group to offer a wider range of services to the existing customers’ in the O&G sector to enable synergies and potentially cross-sell other services.
In other words, Nordic Group aims to provide more segmental services to existing clients through acquisitions, thereby also boosting growth inorganically.

No stock rating or price target provided, as we do not have coverage on Nordic Group Limited.

Chen Guangzhi Phillip Securities | http://www.poems.com.sg/ 2016-08-17

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