MTQ Corporation

[Musicwhiz]

Dear all, Part 2 of my write-up on MTQ's AGM held last month is now up on my blog. Please feel free to visit and leave comments, thanks!

A snippet as follows:-

"When quizzed by another shareholder on why the parent would want to divest PSL when it was profitable and had an unleveraged Balance Sheet, the reply was that the parent was a US-based company with operations and revenue derived from North America; while PSL was the only Asian arm with most of its revenue derived from South-East Asia. Hence, there was a mis-match and the parent considered divesting it to focus more on its core regions. KBW also mentioned that MTQ had been aware of PSL for a long time as a competitor and was simply waiting for a good and ripe opportunity to come along to acquire the Company; thus killing two birds with one stone – integrating PSL’s business and product range with MTQ’s, and also eliminating (i.e. buying out) the competition!

I was also asking the CFO about PSL’s half-year performance ended June 30, 2011 (it had a December 31 year-end), but he declined to give exact figures; only saying that it was “better than budgeted”. I guess there was a certain amount of sensitivity in revealing such numbers as PSL is not a listed company; therefore there is no onus for disclosure of such information. As long as PSL is doing well, I have no worries about not knowing the exact numbers; in fact all I wish is that Management know how to integrate it well with MTQ’s core Oilfield Engineering Division and in time to come, produce positive synergies and tangible benefits for the Division."

[Musicwhiz]

Neptune Marine Services has released its financial report and press release for the year-ended June 30, 2011 (FY 2011). The bottom line took a hit from asset write-downs and one-off adjustments and the Group reported a net loss of A$143.3 million. This was already anticipated with the Company announcing way before that they were in the process of restructuring and that many assets were being divested for cash to strengthen the Balance Sheet and return the Company to profitability.

Looking at the Balance Sheet, it has been significantly strengthened with cash of about A$11 million and debts of just A$4.2 million. Net tangible asset per share stood at A$0.031 (3.1 Australian Cents) per share as at June 30, 2011.

The Cash flow statement still looks rather weak due to the restructuring efforts, but I am hoping to see a more improved cash position and cash flows for 1H FY 2012 ended December 31, 2011.

In the meantime, I guess the COmpany will focus on its core business of getting more contracts without investing in too much capex!

(Please see attached)

[Musicwhiz]

Net tangible asset per share stood at A$0.031 (3.1 Australian Cents) per share as at June 30, 2011.

I think it's interesting to note that Mr. Market has, today, re-rated NMS to its Net tangible asset per share of 3.1 Australian cents. As a result of the release of the FY 2011 financials on August 29, 2011, NMS has, with its stronger balance sheet, soared 40% from a low of 2.2 aussie cents to the current closing price of 3.1 aussie cents.

Assuming the Balance Sheet remains strong and cash flows are stable and consistent, will there be a further re-rating of the business by Mr. Market in time to come?

[Nick]

It has to increase by over 50% before MTQ breaks even !

[Musicwhiz]

It has to increase by over 50% before MTQ breaks even !

Well, I won't really get overly worried if I were you, Nick.

MTQ's KBW has mentioned that the investment in NMS was a strategic one and would be at least for 2-3 years, and he understands that the business will take at least another 1-2 years to "turn-around" after the restructuring charges and divestments. For now, the financials look very "messy" and cluttered as a result of all these changes and accounting entries.

But if the core business should do well and be well-positioned (including their NEPSYS technology), and if the new CEO sharpens NMS' focus on "Back to Basics" as per their presentation slides nearly 9 months ago, then there is a good chance for Mr. Market to continue its re-rating of the Company. Even though MTQ's cost in NMS is above 4 Aussie Cents, assuming the business does grow steadily and surely, share price appreciation should naturally follow.

I feel we should at least wait for the FY 2012 report from NMS, one year from now, before passing judgement on KBW's decision. Even then, it may yet take another year (i.e. FY 2013) before the numbers truly shine (assuming a requirement of 12-18 months for order book to gain momentum, and for the re-focusing on core businesses + expansion).

My 2-cents. Cheers.

[Musicwhiz]

An interesting observation - directors have been purchasing shares in NMS over the past few days. Recall that MTQ has a 15.3% stake in NMS at an average cost of A$0.0467. The following are the transactions:-

Aug 31, 2011 - Peter Wallace purchased 2 million shares at A$0.032 (stake after transaction = 2 million shares)

Sep 1, 2011 - Ross W Kennan purchased 1 million shares at A$0.031 (stake after transaction = 2,865,671 shares)

Sep 2, 2011 - Robert Norman Scott purchased 500,000 shares at A$0.030486 (stake after transaction = 1,360,533).

These transactions come closely after NMS released their FY 2011 results, and the insider purchases from three different directors seem to imply confidence in the Company's prospects.

On a separate note, MTQ's scrip dividend (for those who chose scrip) should be credited on Sep 16, 2011 (Friday) [at 82 Singapore cents/scrip share]. For those who chose cash, they will receive 2c/share on the same day.

[Musicwhiz]

Please see attached announcement on scrip shares issued for MTQ. A total of 983,172 shares were issued which represents savings of $806,200 for MTQ (based on $0.82 per share issue price).

Note: I have chosen to accept scrip in full, instead of cash.

(Vested)

[Musicwhiz]

Neptune Marine Services (NMS) announced today that it had divested of its Australian Fabrication Business for A$0.4 million, effectively eliminating the operating losses stemming from the retention of this business division. It was sold to Kempe Engineering and there is now a strategic relationship between NMS and Kempe with regards to the fabrication division, but which will allow NMS to avoid the crippling operating losses which had plagued the Company before its restructuring.

Please see attached announcement.

[Musicwhiz]

Please follow the link below to download the full statutory accounts for Neptune Marine Services for the financial year ended June 30, 2011 (about 3.14 MB):-

http://www.asx.com.au/asxpdf/20110930/pd...xcz29r.pdf

I think it makes good reading to see what Neptune's plans are and also for the operational review. It may be at least two more financial years before we see NMS making a decent profit and being cash-flow positive.

[Musicwhiz]

After posting so much info on NMS I guess it's time to focus on the Company proper!

Checking through historical records, MTQ normally releases its 1H results sometime around end-Oct or early-Nov. For last year's 1H FY 2011 results, it was released Nov 4, 2010. Thus, I should expect the release of results to be around either Oct 31, 2011 (Monday) or slightly later.

This set of results (announced half-yearly, not quarterly) is expected to look quite terrible, for the following reasons:-

1) Start-up operations in Bahrain are still in the initial stages and thus will be prone to start-up losses

2) Oil prices have drifted down in recent months which may impact the Oilfield Engineering business division to some extent

3) Integration issues with PSL as it was just recently acquired

4) Much higher interest expense as MTQ had taken up significant amount of debt to fund both their Bahrain venture and also their acquisition of PSL

5) Mark-to-market losses (should be reported in statement of comprehensive income) on their holdings for NMS, which have declined roughly 50% from their averaged-down purchase price.

As a result of the above, I may even expect the Company to report a net loss (inclusive of MTM losses) or a slight net profit, which will be down significantly from 1H FY 2011's performance (net profit then was $5.38 million). I guess the more important metrics would be their cash flows from operations and also to judge how high capex will be in the coming months, as most of the equipment and building have been completed (though Phase II of Bahrain is still uncompleted). Critical to my analysis, though, would be Management's assessment of the situation and their long-term strategy for growing top and bottom lines, including margins. Items to watch out for include:-

1) Integration issues between MTQ and PSL, and how PSL has fared in half-year ended June 30, 2011 (it has a December year-end).

2) Comments on performance of NMS, in which KBW is a director.

3) Oilfield Engineering business performance in terms of operations, both in Singapore/SEA and Middle East.

4) Outlook for O&G industry in the near-term, taking into account slowing demand for oil as recession looms and also the recent Shell Bukom fire on Jurong Island.

5) Operating margins for Engine Systems division, and how these have improved/deteriorated. Is the division cash-flow positive still?

6) Comments on integration of three acquisitions (for Engine Systems Division) as per FY 2011 Annual Report into MTQ's operations, and have synergies been achieved. Have the three associates been contributing profits and cash flows?

7) MTQ's Australian reach for Engine Systems, and comments on their partnership with Bosch. Any plans for extending their reach further? Through organic growth or M&A?

8) Plans to manage their debt - channel the debt onto PSL's balance sheet as previously suggested, or to pay down the debt progressively through an amortizing loan instead of lump-sum? Are interest rates favourable for borrowing and how are the Company's cash-flows perceived to hold out in the event of a protracted global downturn?

9) Plans for investment in Hai Leck - is the company doing well and does Management foresee retaining their stake in the near future?

I also have a feeling that an interim dividend may be greatly reduced (perhaps to 0.5c or 1c per share, down from 2c last year) or even absent, and scrip option will once again be available for the Company to conserve cash.

Will post more thoughts here as I continue to think about issues surrounding the Company.