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Friday, March 15, 2013

XMH HOLDINGS: On Track For Record Revenue, Profit In FY13

Source: http://www.nextinsight.net/index.php/story-archive-mainmenu-60/919-2013/6571-xmh-holdings-


xmh_results3.13ON Wednesday (Mar 13), the first trading after XMH Holdings released its 3Q results, its stock fell 2 cents, or 7.4%. 

The fall very likely was due to news of the 3Q net profit being 40% down year-on-year. But the headline number was deceiving. 

The fact is in 3Q of the previous year, XMH had a one-off gain of $1.9 million when it forfeited a customer's deposit after the latter cancelled an order for marine diesel engines.

Taking away that one-off gain, the 3Q profit of $2.15 million in the current financial year actually was higher by 26% year-on-year.

It also underscored the strength of XMH's business as the world's largest distributor of Mitsubishi marine diesel engines for 7 consecutive years. Mitsubishi accounts for about 70% of XMH's engine sales while another 11 brands account for the rest.

While XMH has distinguished itself by being a distributor for 12 brands and has territorial rights across Asia, its peers in Singapore and Indonesia distribute only 1 brand in 1 country, said executive director Sam Chua at the results' briefing this week.

XMH is targeting to add some European brands of engines to its stable, added Mr Chua. It's a cause that will be aided by the weak European market driving principals to seek sales in Asia.


I asked him for insights into the cancellation of the order.

He said it traced back to the shipbuilding boom before the global financial crisis in 2008. 

At that time, ship owners would place orders for engines way ahead of the completion of the construction of their vessels. 

XMH needed 2-3 years lead time for it to source and deliver engines from its principal, Mitsubishi. 

When the shipbuilding industry subsequently went into a tailspin, some orders for engines were cancelled and, after some time, deposits forfeited. 


Record profit, revenue this year?


Even without such deposit forfeitures this year, XMH is on track to achieve record profit in FY13 ending this April, according to RHB Research analysts Lee Yue Jer and Jason Saw.

They are forecasting $11.2 m in net profit compared to the $9.5 million achieved in FY12.

XMH's revenue for FY13 is also headed for a record, as its 9M revenue of $68 million has exceeded FY12’s entire revenue of $62 million. 

A key positive highlighted by RHB Research is XMH's strong ability to generate cash.

As at end-January this year, it had $51.2 million cash (and no debt), up from $47 million just three months earlier.

XMH collects cash deposits from customers, places orders with its principals, and delivers the engines to customers only after receiving full payment. XMH doesn't need to pay its suppliers right away as it enjoys credit terms.

xmh_rhb3.13Source: RHB Research, 14 March 2013

XMH's predictable cash generation lends itself to a discounted cash flow estimation of the value of the business, which RHB pegs at around 45 cents. 

RHB's target price is instead a more conservative 35 cents based on 8x FY13F earnings plus net cash.

Not surprisingly, XMH, on Wednesday, decided it was attractive to buy its fallen shares: It picked up 204,000 shares at between 25.1 cents and 25.5 cents. 

"We think that the current price offers an extremely attractive entry point," according to the RHB report.

At 26 cents, more than half of the S$96-million market cap of RHB comprises cash.

If XMH proposes an unchanged final dividend of 1-c a share, the yield would be 3.9%. RHB, however, is forecasting 1.3 cent, given the company's higher profitability and cash pile.


XMH has an order book of about S$77 million which it expects to be fulfilled by the next financial year. 

It reflects a steadily growing business which counts Indonesia as its main market.

The order book is for engines and industrial generators and accounts for 85% of group revenue. It does not cover another business segment -- after sales services and trading activities -- for which there is no order book.

As the executive chairman, Elvin Tan, said in a press release: “We believe that the demand for commodities trans-shipment in the archipelago of Indonesia as well as improving marine and offshore activities will continue to spur demand for vessels. This together with the Indonesia’s Cabotage Rule will present promising opportunities for us."

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