Maintain BUY, with a SGD0.30 TP (54% upside). These contracts have deliveries stretching into 2017. Z-Power was also awarded the prestigious ABB Value Provider Certification. We believe that strong operations at these subsidiaries could contribute to XMH’s 75% FY16F earnings growth.
■ New contracts worth SGD23.1m
XMH has secured new contracts worth SGD23.1m, of which SGD15.5m were awarded to Mech-Power Generator (MPG) and the remaining SGD7.6m to Z-Power. MPG’s contracts are for backup generators for a data centre worth SGD7.8m, which it expects to fulfill in Sep 2015, and for a healthcare centre worth SGD7.7m for deliveries between Sep 2015 and Mar 2017. Z-Power’s contracts involve the supply of electrical packages to a variety of vessels, with deliveries between 2015 and 2016.
■ Receives prestigious certification
Z-Power was awarded the prestigious ABB Value Provider certification, which allows the company to market as well as build and assemble ABB liquid and air-cooled variable frequency drivers outside of Finland. From this, we estimate approximately SGD20m of recurring revenue for Z-Power going forward. We believe that contributions from MPG and Z-Power, coupled with a gradual recovery in the Indonesian market for XMH’s core engine business, would enable earnings to grow 75% in FY16F.
■ Focus on the cash
XMH’s gross profit margin was strong, at 31.7%, in 3QFY15 (Apr) and we expect its profitability to be maintained going forward as these new contracts may likely result in similar margins. It should also generate healthy SGD28m/20m in operating cash flow in FY15F/FY16F, on the back of its healthy orderbook.
■ Key risks include a delayed recovery of engine orders in Indonesia.
■ Valuations are undemanding
Valuations are undemanding, at 6.2/3.8x FY15F/FY16F EV/EBITDAs and a 5.1% yield. We maintain BUY, with a SGD0.30 TP based on 10x FY16F P/E – which is at a slight premium to its peers’ 8-9x – as XMH offers significantly higher ROICs of 17-20%, has strong cash generation and is in a net cash position. (Read Report)
Source : RHB Research