Monday, February 10, 2020

MTQ Corporation - This Gem Returns Potential 24% Yield, 72% Upside Target In Next 12 Months

This is a quick bullet point takeaway on why I decided to get vested in this company after they announced their Q3 results last Friday and why I think there's further room to run for this company in the next 12 months and beyond.

For those who aren't familiar with this company, MTQ Corporation Limited (SGX: M05) is in the business of oilfield engineering and engine systems. A few of their main core services include OEM, drilling contractors, servicing, rig owning and others. Some of their main customers include Cameron, Halliburton, Seadrill, Total Oil, etc.

In 2015, they faced a huge challenge in their business after the company registered losses for the next 4 years from FY2016 to FY2019 due to oil prices plummeting and some poor M&A which doesn't work out well. In the latest Q3 results, we have seen a huge improvement from their organic business which further strengthen the thesis that the company could be a nice turnaround play for the next 12 months and beyond.

In any case, I have decided to put some money in this turnaround play which to me seems like a fairly cheap valuation at this point and rewards might point to a good decent upside in the next 12 months.

Without further ado, this is 5 key reasons why I decided to get vested in this company.

1.) Turnaround in Core NOPAT in Q3

The company released their latest Q3 results last Friday.

While NOPAT for Q3 was minimal coming in at $197k positive for this quarter, this compared favorably against losses of ($338k) in the previous year. Furthermore, NOPAT for this quarter was disrupted by the completion of non-performing divestment which they recorded a loss of $2.5m in this quarter. Excluding this one-off, NOPAT for this quarter would have been at $2.6m positive, which would translate to about $10.4 annualized under normal circumstances.

They have also made a $0.7m provision for the restructuring of the headcount for the Neptune segment that will contribute lesser from a salary overheads point of view. 

This result is not one-off spectacular in this quarter as it further confirms the thesis in Q2 where the oilfield segment has seen improving margins and business volume coming back in.



2.) Divestment of Non-Performing Neptune Segment

When MTQ announced its takeover offer for Neptune in Oct 2012, the Aussie subsea engineering company was incurring losses.

While it turned around and boosted MTQ's earnings in FY2013, margins was visibly lower due to the higher base of costs of goods and also higher headcount and capex required to maintain the operations. Since then, it has been struggling and pulling the Group's result downwards as demand and margins plunge and the company has been looking for alternative since to pull this segment back into profitability or divestment of this segment.

In Mid-2019, the company entered into agreement to divest its 87.1% of its stake in Neptune Marine to MMA Offshore Limited for $5m worth of cash consideration + share consideration as determined by the VWAP agreement.

What this agreement says is basically the shares consideration will depend on how the share price of MMA offshore is performing 30 days upon completion. If they are doing well in the market, then the implied value will be worth more. If not, it will follow the prevailing agreed implied value in the table below.

As of completion, the share price of MMA Offshore is somewhere in the 0.16 cents region, so it is likely that the company will get the lowest amount of shares consideration at 67.6m shares at A$13.5m implied value.


As of Nov'19, management has also informed that the Blossomvale residue entity will be entitled further A$2m for fixed asset and working capital adjustment, in addition to the above agreement.

3.) Oil Price Has Been Suffering Trough YTD

This is a company that on its good days, it has traded above $2 in their peak days.While we might never see oil goes back to $100 soon, and thus the company going back to their glory days of $2, I think we might probably see oil price going back to mid $60s after the coronavirus situation is over and demand is back to normal.



4.) Valuation Is Attractive

If we assume normal BAU operating profits of $2.6m per quarter for their oilfield engineering segment moving forward, this would translate into approximately $10.4m annualized or 4.8 cents earnings per share.

At 27 cents, this would translate into 17.7% earnings yield or a PER of 5.6x. I think this is ridiculously cheap given the company's turnaround fortune and history of building up this company. 

The company also has a strong record of generating positive operating cashflow, even when they were in the losses during FY2016 to FY2019. Operating cash flow before working capital tends to gyrate between $3m to $4m in each quarter, which translates to above 15% FCF yield annualised after capex. 

5.) Dividends Reinstated & Potential For Special Dividend

These are 2 separate things here but both a catalyst on its own.

First, I think the company would resume the reinstatement of ordinary dividend payouts in this year as the company looks into going back to the black for the first time this year since 2015. 

With forward earnings yield coming in at base 4.8 cents and FCF yield at double digit, we are likely to see the company resuming its dividend payout minimally to 50% at an absolute of 2 cents from FY2021 onwards. At the current share price of 27 cents, this would translates to about 7.4% yield.

For FY2020, we'll assume a more conservative payout at 1.5 cents, which would translates to 5.5% yield.

Second, the divestment of the Neptune segment is likely to benefit existing shareholder in terms of special dividend or dividend in species.

The management has guided that upon completion of the divestment (which was done in Nov 2019), the consideration shares will be distributed pro-rate to shareholders of Neptune as soon as completion and shareholder's approval was done after the AGM. This is likely to be announced together with the final ordinary dividend in their Q4 and full year results sometime later in May 2020.

At $11.5m, this translates to about 5 cents / share, and might be the next catalyst to propel the company share price to advance further in the next 3 months once they announce this in their full year results, subject to shareholder's approval.


Final Thoughts

At an expected conservative 1.5 ordinary dividends + 5 cents worth of special dividends / dividends in species, this would translates into a total of 6.5 cents dividend for FY2020, which translates to 24% dividend yield at the current share price of 27 cents.

This is a one-off due to divestment, so we are likely to see the dividend yield tapers off to a more reasonable yield at base payout from next year onwards.

Still, I think at forward earnings multiple of 5.6x and a potential bumper dividends to come in the next 3 months, we might see a turnaround in the share price (as it already did since the start of this year) and this positive development might further propel the company into the right direction.

For the longer term investors, you are likely to see the company embarking on potential M&A to propel the company into further growth but with their recent failed M&A, I think this is pretty much a black box for now until the management can gather sufficient confidence from its investors.

The company has a 15.4m warrants at an exercisable price of 22 cents, 5 years from the date of issuance which they issued back in 2018.

Target price: 40 cents at re-rating 8x PER multiple, 1.1x forward P/BV in the next 12 months (translates to 72% upside including 6.5 cents expected dividends this FY). 

P.S: Author is vested in this core position at 27 cents as of writing.

Update (14 Feb 2020):

Spoke to Edwin (FC) of the Investor Relation on 14th Feb 2020 to clarify some items pertaining to the staff costs, hedging and considerable shares.

On staff costs, there are increase in number of headcounts in Q3 (to wait for annual report for details breakdown) to support the increase volume of business. I see this as a good confidence turnaround sign given the company has let natural attrition go in the past couple of years and the Group starting to embark on hiring path and increasing headcount again.

On the considerable shares, the $11.5m investment stake in MMA is a strategic move to pass the subsea business to the larger players whom the Group believes can do a better job for them. Similarly, headcount handling the business has also been passed to MMA for day to day operations. The company has no intention to divest the stake yet at the moment even though this remains a possibility in the future.

Thanks for reading.

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17 comments:

  1. Good call B,

    Oil field stocks are recovering. Albeit slowly.

    https://www.barrons.com/articles/apache-stock-oilfield-announcement-energy-stocks-51577128300

    A riskier approach would be to invest directly in these oilfields. A safer approach like what you did would be to look at the oilfield services providers, and their contracts which provide for a margin of safety

    ReplyDelete
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  6. uncle168,

    this type of small company very hard to survive especially now oil prices so low nobody will go to the sea and drill

    now us export oil leh the supply far exceed demand for a long long time

    this company anyhow buy and sell companies, lose money then sell then buy another one, macham like throwing darts in the air

    the cash from rights issue very fast finish one where got gibe you dividend wait long long

    i think will end up like straco

    you should worry about your mortgage and tenant defaulting on rents

    keekeekee

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    oil prices peaked in 2014 after that it is normalising

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