Excerpts from analysts' report
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»The worst is over. The distribution and after-sales business segments were hit by the Indonesian elections during 4QFY14 and have since gradually recovered. XMH plans to complete its new facility with new products coming online in FY16F, with incremental contributions on top of a recovery in the core business. The company has also been implementing stringent cost measures, yielding sharply lower distribution expenses in 3QFY15 which we expect to be maintained.
Z-Power specializes in the assembly, retrofitting and manufacturing of type-tested switchboards, distribution panels, console, control systems, switchgears and other integrated marine automation products. Photo: Company» MPG and Z-Power to contribute to earnings. Mech-Power Generator (MPG) was recently awarded SGD11.3m worth of contracts to supply Changi Airport’s upcoming Terminal 4 and a 5-storey data centre in Jurong Industrial Estate with standby generators.
In addition, XMH has just completed the acquisition of an 80% stake in Z-Power group, which should provide approximately SGD20m of recurring revenue each year.
» Margins expanding again. XMH’s gross margin was up 2ppts QoQ and 5ppts YoY due to increased margins across all business segments. We estimate that Z-Power’s gross margin is within the same 28-30% range and that these margins should be sustainable going forward.
» Maintain BUY with a lower SGD0.30 TP based on 10x FY16F P/E. We cut our FY15/FY16 earnings estimates by 45%/21% to reflect the hits caused by the Indonesian elections during 2HCY14 (1HFY15). XMH’s net cash position should provide some comfort for investors.
Valuations are undemanding at 8x/5x FY15/16F P/Es with a 4.3% yield. Our TP is based on 10x P/E, at a slight premium to its peers as XMH offers a significantly higher ROIC of 17-20%.
Full report here.
