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, 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. (Read Report)
Read Related Report
MTQ Corp - Challenging Environment Persists
Wednesday, 29 July 2015
Wednesday, 29 July 2015
- RHB Research
Source : CIMB Research