XMH Holdings

[CityFarmer]

OSK-DMG analyst report on the company

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XMH Holdings Results Review: MPG Takes Up The Temporary Slack
(BUY, SGD0.32, TP: SGD0.45)
Lee Yue Jer, +65 6232 3898 (yuejer.lee@sg.oskgroup.com)
Jason Saw, +65 6232 3871 (jason.saw@sg.oskgroup.com)

XMH’s SGD3.2m 3QFY14 earnings was up 48% y-o-y, with MPG’s
contribution outweighing the slowing marine engine wing. We expect
the latter to rebound within six months, though, after Indonesia’s
elections conclude. Pipeline acquisitions provide near-term catalysts.
Maintain BUY with a lower SGD0.45 TP to reflect the slowing core
business, but we highlight the upgrade potential on acquisitions.
Healthy earnings. XMH’s 3QFY14 earnings of SGD3.2m were strong, but
still below expectations due to the persistent slack in its marine engine
segment coupled with a weaker IDR. Customers are still delaying on taking
delivery while awaiting the conclusion of Indonesia’s elections. The 27%
gross margin was above our forecast, however. We cut FY14F/15F
estimates by 24%/10% to reflect the slowing marine engine distribution
segment and the IDR impact on revenue. The acquisition of Mech Power
Group (MPG) is delivering strong earnings and healthy margins in line with
the XMH’s businesses.

New building to cost less than original estimates with earlier
completion. We initially factored a building cost of c.SGD60m for XMH’s
new facility. This figure has now been revised downwards to SGD56m, with
an earlier completion date. This allows operations to begin in 3QCY15, ie
XMH’s 2QFY16.
Acquisitions in the pipeline. XMH is still on the acquisition warpath, with
a few deals that could be potentially closed within the next nine months. It
previously purchased MPG at a forward P/E of 4x in a part-cash, part-share
deal. We expect future acquisitions to be of a similarly accretive nature.
Risk lowered via business diversification. With the acquisition of MPG,
XMH has lowered its overall risk, diversifying its business across markets,
currencies and businesses. There is now a healthy mix of exposure in the
Indonesian and Singapore markets, earning a mix of IDR, SGD, and USD.
We continue to like this strongly cash-generative company. Maintain BUY
with SGD0.45 TP (from SGD0.50), highlighting the potential upside from
near-term acquisitions.
http://remisiers.org/cms_images/research...atters.pdf

[GreedandFear]

OSK ascribes lower engine sales in Indonesia to uncertainty about the upcoming Presidential elections. However, I suspect that they are also impacted by global lower coal prices. If my understanding is correct, many of the engines are used for barges to transport coal but lower coal prices make new mines less viable and hence growth in engine sales is likely to suffer.

[BlueKelah]

OSK ascribes lower engine sales in Indonesia to uncertainty about the upcoming Presidential elections. However, I suspect that they are also impacted by global lower coal prices. If my understanding is correct, many of the engines are used for barges to transport coal but lower coal prices make new mines less viable and hence growth in engine sales is likely to suffer.

If you read enough company reports, you will notice most shipping related companies have been impacted by slowing global trade. It is not a rosy picture out there. And since shipping and transport sectors are good indicators of movement of goods, it can be concluded that major economies are not faring that well.

The deal has been funded internally and after this XMH will still be in a net cash position with increased earnings and revenue. So not too bad. However based on NAV there is no margin of safety yet heh so really not for me maybe around 10 cent level is ok

[sykn]

I chanced upon this counter and found something quite unusual - ROE consistently around 20%+ for the last 4 years, and yet Owner's Earnings (OE - Buffett's Way) have not grown at all in this period - I find this highly unusual (first time I come across). On closer examination of its balance sheet, I discovered that its dividend payout ratio is around 45%, so for each year of its $8M net earnings, about half is paid out as dividends. Then it also engages in quite aggressive share buy backs (good thing?) of around $2M; not sure what are the dynamics of doing this; hence only $2M left as retained earnings which explains why its OE growth is not happening! I also noticed its $11.4M goodwill booked on acquisition of MPG and the FY13 foreign exchange translation loss of $5.87M. This is the first case where I see high ROE in a company but dare not jump in to invest. Thanks to all my value-buddies for your contributions!

[CityFarmer]

I chanced upon this counter and found something quite unusual - ROE consistently around 20%+ for the last 4 years, and yet Owner's Earnings (OE - Buffett's Way) have not grown at all in this period - I find this highly unusual (first time I come across). On closer examination of its balance sheet, I discovered that its dividend payout ratio is around 45%, so for each year of its $8M net earnings, about half is paid out as dividends. Then it also engages in quite aggressive share buy backs (good thing?) of around $2M; not sure what are the dynamics of doing this; hence only $2M left as retained earnings which explains why its OE growth is not happening! I also noticed its $11.4M goodwill booked on acquisition of MPG and the FY13 foreign exchange translation loss of $5.87M. This is the first case where I see high ROE in a company but dare not jump in to invest. Thanks to all my value-buddies for your contributions!

The company operates mainly distributorship business. The WC is the key part of analysis on cash flow. Owner Earning (OE) is just another name for FCF, IMO.

The company's OCF is cyclical, due to the working capital. An average of last 4 years (2x the 2-years cycle) FCF is about 9m, which sufficiently sustains the dividend payout of 4 mil, and 2m share-buy-back if needed.

ROE/ROA of 26%/14% (as FY2013) means the share-buy-back is pretty meaningful. Investing in a company with ROE of 26%, is definitely making good use of the money.

There is no goodwill accounted in AR 2013.

High ROE means growth in FCF? May be you means cash reserve. Cash reserve was 44 mil in FY 2013, up from 33 mil in FY 2010.

The reporting currency is S$, while key functional currency is Yen, thus the FX losses, due to swing of Yen recently. FYI, it is an accounting losses, not real cash losses, since most cash reserve is in Yen.

(not vested)

[sykn]

Thanks for your words of wisdom. I'm a newbie investor, so still learning the ropes. Will study your points to greater detail tonight. Once again, much appreciated.

[CityFarmer]

Thanks for your words of wisdom. I'm a newbie investor, so still learning the ropes. Will study your points to greater detail tonight. Once again, much appreciated.

No problem. With a right attitude, lots of guru here are willing to give "tips" to newbie, not stock but analysis "tips"

[CityFarmer]

One bad news on the company. It is quite a big sum to pay, relative to its net profit. The incident raises concern on the company's quality control...

(not vested)

XMH Holdings: Providing For Legal Outcome Exposure (BUY,
SGD0.32, TP: SGD0.41)
Lee Yue Jer, +65 6232 3898 (yuejer.lee@sg.oskgroup.com)
XMH may have to pay SGD3.5m in damages related to alleged
defective units sold in June 2010. This will likely result in a breakeven
situation for 4Q14, which closes this month. We trim our P/E to 12x to
reflect possible negative sentiment on this case and the “wait-andsee”
attitude of the Indonesian market, but still like the company for
its clear mid-term growth. Maintain BUY, with a lower TP of SGD0.41
(from SGD0.45).

http://remisiers.org/cms_images/research...atters.pdf

[CityFarmer]

This is a good news of the company...

(not vested)

XMH announced that it has won contracts worth USD3.6m,
achieving a double breakthrough in the process. The first contract is for more
than 24 units of Mitsubishi marine engines, with the company expecting another
10 units to be secured in the next two months. The significance of this contract is
in the geography - this is the first time that XMH has successfully made sales into
the Vietnamese market, which will reduce its reliance on its traditional Indonesian
market. The second contract is for a low-speed Akasaka main engine for use in a
Pertamina tanker. This is XMH's first successful sale of a low-speed main engine.
The successful breakthrough of XMH into a new geographical market and a new
product segment is positive for future sales. We currently have a BUY
recommendation on the stock with a SGD0.41 TP. (Lee Yue Jer)

Ref: http://remisiers.org/cms_images/research...atters.pdf

[sykn]

Thanks for the tip off. I also read this in the announcements. Must say that the amount is not fantastic, although XMH is breaking new ground in Vietnam. Coupled with the fine and my gut feeling of discomfort over this counter, I am also not vested at this point in time.

This is a good news of the company...

(not vested)

XMH announced that it has won contracts worth USD3.6m,
achieving a double breakthrough in the process. The first contract is for more
than 24 units of Mitsubishi marine engines, with the company expecting another
10 units to be secured in the next two months. The significance of this contract is
in the geography - this is the first time that XMH has successfully made sales into
the Vietnamese market, which will reduce its reliance on its traditional Indonesian
market. The second contract is for a low-speed Akasaka main engine for use in a
Pertamina tanker. This is XMH's first successful sale of a low-speed main engine.
The successful breakthrough of XMH into a new geographical market and a new
product segment is positive for future sales. We currently have a BUY
recommendation on the stock with a SGD0.41 TP. (Lee Yue Jer)

Ref: http://remisiers.org/cms_images/research...atters.pdf