Towards Financial Freedom
Technics - Putting On The Asset Weight
Technics (TGH) announced that it has been awarded its first leasing contract worth SGD3.6m for two gas compressor engine driven packages for a Malaysian client. While we understand that the margins are good, this is a definite shift towards an asset-ownership model that will tie up capital. Given the weak outlook in the core Technics businesses, we are maintaining our SELL call with a TP of SGD0.64.
- Small value, high margin business providing constant income stream. The contracts are for two years plus one-year options, and while the contract size is small, it does provide a stream of income and cashflow that will help cover overheads.
- Fixed assets could double over the next two years. Assuming that each compressor package costs about SGD2m, a "fleet" of 25 packages (scaling up to a meaningful size) would require a capital investment of SGD50m. This is heavy relative to TGH's current SGD39m in fixed assets, and represents a shift from asset-light to an asset-heavy model.
- Capital demands likely to depress future dividends. The high capital expenditure will tax TGH's ability to pay dividends. Save for a potential special dividend from selling the Norr Offshore Group (which is likely priced in), the dividend growth outlook remains muted.
- Poor fundamental outlook. Downside risk clearly exists with half-year revenues/profits at SGD19m/SGD0.8m (vs. FY13F's SGD52m/ SGD6m). TGH's valuations in the past were held up by i) Capital reduction exercise spanning three years in which it paid out 8 to 12 cents of dividends yearly from FY10 to FY12, and ii) Consistently healthy order books providing up to nine months' visibility. Valuations now look lofty with dividends likely to be omitted this year, and visibility has diminished as the company has not reported its order book for two consecutive quarters.
- Maintain SELL pegged to 1.78x FY14F P/B. Asset-heavy companies tend to be valued near book value, with a premium for delivering returns above the cost of equity. Our P/B peg of 1.78x already incorporates this premium, and we maintain our SELL call with a TP of SGD0.64.
Source: OSK
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