HL Tiong says he is an average Singaporean in his early 30s, has a full-time job, is happily married and caught within the sandwich class. He lives in an executive condominium with a "mountain-like mortgage". "My goal is to achieve financial freedom as early as I can. My target is 45 years old. I don't mind working but I hope to provide my wife an option not to work." The following article was recently published on his blog and is republished with permission.

THIS POST on XMH Holdings ("XMH") is in response to a reader's request. XMH distributes marine and industrial diesel engines and generators.

Its customers are shipyards, shop owners, hotel proprietors and mine owners.  

XMH_chart1.14Chart: Bloomberg

XMH's price chart (above) shows that its share price had a run-up of 80% in the last 12 months. Is there more upside to be realised or will gravity get the better of XMH's share price?  

Without deep diving into the business, I find there are several aspects to like about XMH.  

(1) XMH is conservatively financed

From the latest announcement, there are $15.5 mil borrowings. In the same period last year, borrowings were negligible at $342k.  

Reason for the increased leverage is the consolidation of MPG Group.

While no longer debt-free, XMH's gearing is still comfortable at debt-to-equity ratio of 27%.  

(2) Sustainable dividends

Annualised earnings per share (EPS) based on half-year results is 2.22 cents.  

Current year profits have so far not matched up to last year's levels, but XMH should be able to maintain last year's dividends of 1.2 cents (representing a dividend payout ratio of 54%).  

A dividend of 1.2 cents also means a yield of 3.4% - nothing REIT-like but definitely better than putting your money in the bank.  

With $48.7 mil cash and cash equivalents, it gives me considerable comfort that XMH should be able to continue funding a 1.2 cents dividend (annual outflow of $5 mil).  

(3) Fairly priced earnings and likely justification for assets premium

250_Elvin-TanElvin Tan, executive chairman of XMH Holdings. NextInsight file photoWe mentioned earlier EPS is 2.22 cents. This represents a price-to-earnings (PE) ratio of 16 times.  

I think the price is probably fair (not cheap) relative to earnings.  

XMH's net asset value is 13.4 cents per share. So current price of 35 cents is a 261% premium over book value!  

Does XMH's business really command such a premium? Return on equity (ROE) is 16.6% which is high, and taking away leverage, return on assets is 8%.

Favourable statistics.  Look out for the following  

(a) The original business is deeply affected by the declining rupiah so the move into MPG can be seen as a positive move to diversify its revenue base.

I was initially unconvinced that MPG is value-accretive because I see no positive impact to the bottom line from MPG.  

But MPG's lumpiness in earnings is something that management has assessed and if the analyst is right, the impact on bottom line is going to be more significant in coming quarters (due to accounting, the revenues are recognised upon delivery rather than percentage of completion which does not match nicely with the expenses incurred, causing bottom line impact to be skewed).

Therefore, the estimated P/E is likely less than the 16 times that I initially arrived at using the annualising method.  

(b) Share buybacks + Mr Koh's capital injection (via Credence Capital) 

Between 31 Oct and recently, more than 2 mil shares have been bought back by XMH from the open market.

The average price was much higher than last traded price. Usually that is some comfort and a good signal to the public that management has good views of the company's future prospects.  

Koh Boon Hwee is a very long term investor - so long that his holdings in Hupsteel are still likely in the red.

But he has a following so that attracts new investors to view XMH as something potentially interesting.

Just remember that he has a lot of holding power and our investing horizon may jolly well be different. He can easily stomach unrealised losses.  

(c) Long term potential of diesel-powered generator sets  

mech-power_setsIf you are vested, I suggest keeping tabs on the development of the business of diesel-powered generation sets and its attractiveness.  

There might be continued market potential overseas for coal industries, but in Singapore, the BCA and other relevant authorities are pushing very hard to "greenify" power usage in buildings.

Diesel-power generation may be substituted as better technologies come to market.  I am also concerned about the partnerships. There is a risk that the exclusive distributorships will not continue or that the original manufacturers would prefer to develop their direct presence in the region.  

XMH carries a range of products, not just a specific manufacturer's product which is signed under an exclusivity agreement.  

To sum up... Fundamentally XMH is a good business.

It's not management's fault that the price is rich. But I would say that current price may have already factored in better earnings prospects.  

OSK-DMG's target price of 50 cents is based on 14 times forecast earnings. I don't disagree with using 14 times.

14-15 times is a fair gauge of long term trading P/Es for many companies. But I am not too sure about the upside used in its earnings forecasts. OSK-DMG is forecasting earnings in FY14/15 to reach around $16 mil.

If you do just a straight-line annualisation of current half year results, it will get you to $9.4 mil.  

The target price of 50 cents represents 43% upside from last traded price of 35 cents.

But I feel the projections lean towards optimism and only makes sense if there is a jump in earnings.   I think the concern over lumpiness of earnings will be better clarified in the next announcement.

If earnings catches up, the stock price may move upwards.  If not, there could be further decline in line with a broader lower earnings figure (despite MPG).

Management will likely blame it on the rupiah and beg investors to be patient on MPG.

Disclaimer: I am currently not vested in XMH.

Recent stories:

XMH: New acquisition to boost revenue contribution from S'pore

Buyback by XMH HOLDINGS, Fund buying @ GOLDEN AGRI 


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+1 #5 Desmond Yao 2014-01-20 10:48
Vested in XMH. Bought it at a high, after seeing your post on XMH, it boost some confidence in me, looking at the drop price recently makes me sad! haha. anyway, in stock market, you win some, you lose some. I enter some stock recently to lower my Avg weight price. Finger cross, and i will be patient over XMH. some good years ahead for XMH. :D
+1 #4 kyle 2014-01-13 21:50
It looks like MPG is a good deal. However, from the other point of view, the management draws out a lot of interest on MPG, which makes me feel that how much its main business will further drop.

Q2 net profit dropped 43%, but the admin expense doubled. This also makes me feel not comfortable.

Let's see their next Q result...
+1 #3 HLTiong 2014-01-12 22:24
Hi Leong Teck, kyle,

Thanks for your generous comments. Let's monitor XMH closely as there is always a chance that earnings may surprise us on the upside in the next announcement. Especially since there is suspicion that MPG's earnings contribution is lumpy.
+1 #2 ontheball 2014-01-12 18:25
Really appreciate your analysis of XMH. It's helped me to decide against buying the stock for the time being. Thanks.
+1 #1 kyle 2014-01-12 18:05
Thanks for the good analysis. quite agree with most of the comments. still expecting the price further drop a bit... The price is not cheap right now

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