XMH -- target trimmed to 41 cents, MENCAST -- 76 cent Target

OSK-DMG trims target price of XMH to 41 cents

Analyst: Lee Yue Jer  (left)

Contract woes lead to short-term pain. The claims are related to a contract for four propulsion units delivered to Pacific Marine & Shipbuilding Pte Ltd in June 2010, which the plaintiff alleged was defective. 

XMH’s total potential exposure is SGD3.47m in losses and damages. While we await management’s decision on a potential appeal that may reduce or reverse the judgment, we expect the company to make a provision of this size.

As this is nearly equal to our 4Q14 profit estimate, we now expect a breakeven position for the final quarter ending April 2014. 

Potential short-term negativity. The news is likely to result in short-term negativity on the stock, especially since customers are delaying receipt of their orders due to uncertainties surrounding the Indonesian elections. We do expect “business-as-normal” conditions to resume after the Indonesian elections are concluded.                                                                          

XMH acquired Mech-Power last year from Mrs Corrine Loke, controlling shareholder of Mech-Power (extreme right) and her husband, Clive (extreme left). With them is Elvin Tan, chairman of XMH. Photo: Company

Mid-term growth outlook intact. We continue to like XMH for its clear mid-term growth potential from:

i) the contributions of fast-growing subsidiary Mech-Power Generator, 

ii) the new production facility, which is expected to come online in 2Q16, and

iii) potential acquisitions in the near term. 

TP dips to SGD0.41 on a lower P/E. XMH is now pegged to a 12x FY15F P/E to reflect the potential negative sentiment arising from the legal case and the uncertain Indonesian market – which results in a SGD0.41 TP (vs SGD0.45 previously)

The healthy 4% dividend yield should support valuations at the current price, with potential re-rating catalysts from new contracts in new markets as well as acquisitions. Maintain BUY.