Mencast Holdings

[Nick]

Mencast’s FY2010 earnings up 20.9% to S$8.5 million

http://info.sgx.com/webcoranncatth.nsf/V...10032D0DE/$file/FY2010PressReleaseFinal.pdf?openelement [Press Release]

http://info.sgx.com/webcoranncatth.nsf/V...10032D0DE/$file/FY2010announcementFinal.pdf?openelement [SGX Announcement]

Quite pleased with the latest set of results - this is the 6th consecutive year of revenue and profit growth. Gross margins and net margins remained stable at 49.8% and 26.5% respectively. The Group remained slightly in the net cash gearing partially thanks to the share placement conducted in Nov 2010. ROE stood at 21%. The sterngear manufacturing division doesn't look likely to grow this year due to the drop in ship-building and hence the demand for its products. On the other hand, the sterngear service division looks set to grow due to increased size of the global fleet. Mencast prides itself as a domestic market leader with over 60% market share in the sterngear service sector. Its major clients are ASL Marine, Labroy Shipyard, Keppel and so on. The Group looks forward to its water-front Penjuru plant to be operational in 4Q 2011. The main disappointing thing in the report was its poor operational cash-flow which dipped due to a sharp increase in receivables. I wonder is this due the nature of its service business ?

The Group increased its FY dividends by 10% to 1.1 SG cents. It is currently trading at a PER of 7.5. Manufacturing division order-book stands at $8.0 million. This catalist stock is highly illiquid. Hopefully it will grow its equity base faster so that it can be promoted into the Mainboard within the next 1-2 years.

(Vested)

[Musicwhiz]

This looks like a promising company, Nick.

But could I find out from you on its competitors? And what market share does Mencast command in, say, Singapore?

Thanks.

[Nick]

Hi MW,

I googled the term 'Singapore Sterngear' and majority of the links on the first page was on Mencast. The other reference was the private company Stone Marine. Mencast acquired its rival/partner Recon propeller in 2009 so there should only be this 2 companies left.

http://www.sgmarineindustries.com/catid-...ns_MG.aspx

CEO alludes that Mencast has 65% market share in Singapore sterngear service sector -

http://singaporestockmarketnews.blogspot...-into.html

Hope this helps

[Musicwhiz]

Thanks Nick.

Yes, I read about how Mencast acquired Recon and Denfon in July 2009, effectively expanding their scope of services. This was the reason for the full-year recognition of revenues (and expenses) in 2010 as compared to 6 months only for 2009.

If Glenddle Sim mentioned in 2010 that Mencast's market share is 65%, and there is only one other player, then logically Stone Marine should have the other 35%. Any idea on Stone Marine's margins and plans for expansion? Also, do you know why there are (apparently) only two players in this sterngear industry? Is it due to high barriers of entry or is it a very niche market? Appreciate your views on this.

For a Company to have a 49% gross margin would imply their markup on cost is 100%! I am disappointed that Mencast cannot break down its gross margin by division (i.e. Manufacturing versus Services) as they mentioned the costs are lumped together and it will not be practical to allocate to each division. Hence, we only know the blended gross margins from both divisions as reflected in the Income Statement. As always, services always has a much higher gross margin than manufacturing; and I suspect services could be even higher than 50%.

I am curious though - if services is a more lucrative business, then why is the Company buying Penjuru to expand their Manufacturing capacity? Why spend more on a lower Gross Margin division? Do they anticipate a rebound in ship-building activity? Unlikely since there is still significant over-supply in the world. Any thoughts?

The other red flag (to me) are the higher receivables. It may be prudent to find out (during the AGM) who their major customers are for services vis-a-vis manufacturing, and whether there is a possible issue of bad debts requiring impairment recognition in future periods. A jump of 100% for receivables far outstrips the increase in revenues. Inventory increase can be explained through higher sales volume, but usually a jump in receivables may indicate longer repayment terms.

Thanks!

(Not vested)

[Nick]

Hi MW,

I will try my best to give an objective answer.

Stone Marine

Stone Marine (Singapore) is a private company so I cannot find out what its earnings are like. This is its website - http://www.stonemarine.com.sg/

More importantly, Stone Marine is part of a larger Langham Industries Group (a UK marine engineering firm). LIG is a private firm so I cannot find any updated financial information about it. However, I did learn that it posted the following set of results for FY 2009 -

Revenue: 31.17 million (UK Pounds)
Net Profit: 5.29 million (UK Pounds)
Margin: 17%
( http://www.worksmart.org.uk/company/comp...areholders )

Since Stone Marine is part of this LIG, I would expect its revenue and profit to be smaller. Again, this is very much guess-work since the direct rival is a private company.

High Barrier of Entry ?

From what I noticed, there are 4 key characteristic to describe this business -

1) Technology and quality of service - skilled workers and equipments must be in place.
2) Concentrated clientele (primarily local shipyards) - relationships cannot be built over-night. Customers are Keppel, Swiber, ASL Marine, Labroy, Marco Polo etc.
3) Small Industry - I don't think the market revenue exceeds $50 million. Doesn't make sense for any new company to set up a biz here when the pie is small.
4) Strategic alliance with Becker Marine as its preferred manufacturer of its products in the region - This may be a double edge sword if Becker chooses to walk away...

Receivables

Main red flag. I am guessing this is due to the higher revenue recognition from the service segment. In the previous years, the manufacturing division took up the lion share of the revenue so cash-flow management in that division may have been better. In the service division, I don't think their cash-flow management has improved yet. This is something to watch out for.

Penjuru Plant

I believe the Management mentioned that the plant will allow them to manufacture sterngears for larger vessels (tankers, containers etc). From what I noticed (based on Cosco, YZJ announcements), it seems there is an appetite for larger vessels rather than smaller ones. Moreover, there are plans to expand their range of products to specialized oil and gas modules. At the moment, they are only manufacturing rudders for smaller vessels. I think this is tied to Becker strategic alliance as well.

Future

I am more bullish about their service segment since the fleet size is increasing. But, I am not sure whether their regional expansion plans will succeed. Revenue derived from the region dropped in FY 2010. The manufacturing division, while may experience a boost with the Penjuru plant in operation, relies on the cyclical ship-building division. The good thing is that their cycles are opposite of each other haha ! It is a family run business as well though the new CEO is a young chap so succession planning is done and dusted.

[Alf]

Hi, I am a novice investor, still in learning stage.... I am vested in Mencast and i dropped an email to them asking about the significant increase in their trade receivables...This is their replies....

(1) Is there a plan in place to speed up the collection of those trade receivables?
Yes definitely, the Group always works towards speedy collection of the trade receivable, but please do keep in mind that many of our orders are from repeat clients, so we do give some leeway to those clients.

(2) Do your company forsee any significant increase in impairment of doubtful trade receivables?
For Mencast, impairment of doubtful receivables has been very small historically as can be seen from our cash flow statements and we don’t foresee any significant increase in impairment of doubtful trade receivables

(3) Based on the latest Yr 2010 result, the trade receivable is currently at 42.06% in relative to the Yr 2010 total revenue, what will be ideal percentage of the trade receivable in relative with the total revenue moving forward?
The company does not take only the receivables part in mind but rather the entire cash conversion cycle. Based on the latest numbers, the cash conversion cycle is about 64 days, which is quite good considering the industry.

What is your opinion on their replies?

[Nick]

MENCAST: After record 2010 profit, will there be encore in 2011?

http://www.nextinsight.net/index.php/sto...84-mencast-

The Nextinsight team wrote a piece on Mencast today covering their latest set of results and near term plans of continuing their 6 years of increasing profitability record. Wonder will they seek Mainboard listing soon ? The final dividend of S$0.011 will XD on 4th May.

(Vested)

[Musicwhiz]

An interesting article, thanks. No doubt it will be interesting to track Mencast's fortunes and financials over time, to see how they do. The yield is currently rather low, but then again since it is in expansion mode I guess they will be needing the cash....

(Not vested)

[Nick]

I think so too MW though I was hoping for a slightly higher dividend haha. Cash will be needed for Penjuru expansion and hopefully a synergistic acquisition in the region for it to spread it wings. I think it will be difficult for it to replicate its double digit growth figures this year without any acquisition. 2012 should be a bumper year when the new facility is operational.

[Musicwhiz]

I think so too MW though I was hoping for a slightly higher dividend haha. Cash will be needed for Penjuru expansion and hopefully a synergistic acquisition in the region for it to spread it wings. I think it will be difficult for it to replicate its double digit growth figures this year without any acquisition. 2012 should be a bumper year when the new facility is operational.

Have you factored in the start-up costs relating to the new facility and the associated depreciation on the building and macinery? If so, then FY 2012 may not be "bumper" in the strict sense of the word. This is similar to MTQ's Bahrain expansion where the initial one year would see high start up costs and staff training costs and hence would incur a loss.

Speaking of which, the new Penjuru expansion seems to be indicate organic growth of Mencast's business. I also noted that their growth has been driven by M&A (Refcon). So, in your view, how much do you think future growth will be attributable to organic, and how much of it will be acquisitive? Problem I have with acquisitive is that more funds may be needed - so fund raising and higher leverage could be an issue.

Thanks!

(Not vested)