We took XMH on a non-deal roadshow (NDR) last week. Maintain BUY with marginally lower SGD0.24 TP (from SGD0.25, 60% upside). Management was optimistic on Vietnam’s shipbuilding boom where its engine products are seeing stellar growth. Indonesia deliveries were still slow, but we are beginning to see movement in long-awaited infrastructure projects, further supported by multiple rounds of economic stimulus packages.
■ Expansion into Vietnam more than fortuitous
Last year, XMH saw potential in Vietnam as the country’s relationship with China began to be impacted by maritime issues. As the country began boycotting Chinese suppliers while simultaneously ramping up its fishing vessel shipbuilding processes, the market for XMH’s Japan-based Mitsubishi (8058 JP, NR) engines rode on a rising tide. Though coming from a small base, management expressed confidence that Vietnam is likely to become one of its most important markets in the coming years, alongside Indonesia.
■ Indonesian slump taking longer than expected to recover
The Indonesian market began slowing down months before the 2014 elections, and expectations were for it to rebound shortly after the presidential inauguration. However, political infighting since then has led to continuing uncertainties and an economic slowdown. As a result, customers continue to delay taking receipt of engines ordered. However, as 2015 approaches its close and budgets have to be spent, projects are beginning to be green-lit. To be conservative, the lack of visibility here prompts us to trim earnings by 5%/4% for FY16F (Apr)/FY17F.
■ Overall, XMH is still a high ROIC business
Even at its earnings trough last year, XMH still delivered 9.1% ROE and 7.4% ROIC, a laudable achievement for a company whose main market was stagnating. With stronger operational and geographical diversification today, XMH should enjoy a higher level of stability. Our TP is adjusted to SGD0.24, still based on 12x FY16F P/E. A turnaround in Indonesia is in sight, giving reason for optimism on the company successfully executing an operational rebound. Key risks are customer delivery deferments and shifting political winds. (Read Report)
Source : RHB Research