MAY TO OCTOBER 2013 was a challenging 1HFY2014 for XMH Holdings as the Indonesian rupiah slid over 10% from 9700 IDR/USD to over 11,000 IDR/USD.
The rupiah continued to depreciate in November and December.
With the fall in the rupiah, vessel owners and operators in Indonesia have been delaying taking delivery of their engines in the hope of reducing their currency exposure.
This delay has contributed to a drop of S$4.7 million in revenue from its distribution and after-sales business.
Revenue for the solutions provider of diesel engine, propulsion and power generating sets had been driven by demand for tugs and barges used for transporting coal in Indonesia.
During 2Q2014, XMH’s revenue growth slowed to a 1.2% year-on-year increase to reach S$27.1 million.
Almost 20% of the revenue was contributed by its newly-acquired wholly-owned subsidiary, Mech-Power Generator, which posted revenue of S$5.1 million for the two months of recognition (Sept and Oct).
Most of Mech-Power’s revenue comes from Singapore -- which will effectively and significantly diversify the geographical contribution to XMH.
“We are working very hard to reduce our reliance on the Indonesian market and spread out our revenue base,” said deputy CEO Alphonsus Chia during a meeting with analysts and fund managers yesterday.
Not only does the acquisition provide geographical diversification, it broadens the Group’s range of products and services.
In Singapore, every building of more than 4 storeys is required by law to have standby generator sets.
As Mech-Power is Singapore’s leading manufacturer in the assembly, sale and service of diesel-powered generator set, XMH is set to ride on Singapore’s economic and infrastructure growth.
XMH’s net profit attributable to shareholders fell 43.8% in 2Q2014 to S$2.0 million due to provisions for payroll expenses arising from its acquisition of MGP Group.
The outstanding group orderbook is S$113 m.
OSK-DMG analyst Lee Yue Jer, in his report this morning, wrote: "As XMH remains a fundamentally strong company, we maintain our BUY call, with a lower SGD0.50 TP."
Below is a summary of questions raised at the meeting and the answers provided by Mr Chia as well as financial controller, Johnson Yap.
Q: 2Q2014 distribution expenses increased by 76.2% to S$1.6 million while administrative expenses almost doubled to S$2.1 million. Do you expect these expenses to remain this high?
There are 3 reasons for the increased staff expenditure:
(1) General increase in staff cost
We implemented better practices for wage adjustments, such as pegging staff bonus to performance and salary increase to inflation. Staff cost has gone up because we have given an across-the-board salary increase.
We now have more people and more highly qualified persons. We recently hired a Director of Operations, who used to work for Omni Industries and Celestica. Such people will strengthen our management team.
(2) Change in the way bonuses are paid
In 1HFY2014, we began to pay staff incentives month by month, instead of at one point in the year, so as not to skew our financial results.
(3) Inclusion of Mech-Power's operating cost to the Group's accounts
We consolidated 2 months of Mech-Power's results at a time when its revenues were lower than normal. Its revenue is lumpy as the business is project-based but we expect higher revenues in the future. Mech-Power's order books during April to October show them to be on track to meet their profit warranty to us.
Q: How much revenue did Mech-Power contribute?
Their two-month contribution to XMH was S$5.1 million.
Q: What was Mech-Power's pre-tax profit for the two months?
They made a small loss because their revenue was too low to cover costs. Also, half of the loss was from currency translation.
Q: Is there recurring revenue from your spare parts business?
We sell a million Sing dollars' worth of spare parts or more every month. After a certain number of hours in use, manufacturers recommend engine replacement. We provide genuine spare parts.
Q: How long do you allow customers to delay taking delivery of their orders before you forfeit their deposit of 20% to 30%?
Contractually, we have the right to forfeit their deposit without giving time allowance. However, we normally give them 3 months' allowance so as to maintain good customer relations.
Q: What is your customer spread?
In a single year, we usually get about 10 big buyers. The following year will be another group of 10 or so big buyers. Our customers include shipyards (for newbuilds) as well as vessel operators (for replacement). We prefer to sell to the end-user, because shipyards are very demanding when negotiating prices.
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