Mun Siong Engineering Ltd: A Compelling Valuation Story

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Mun Siong Engineering by SG Value Investor, The Value Edge

Est. in 1969, Mun Siong Engineering Ltd (SGX:MF6) (‘MSE’) is a leading integrated engineering solutions provider to the process industries. The company started out as a mechanical business having three core business divisions – maintenance services, project works and specialised services. With more than 44 years of track record, long-standing business relationships and broad experience, the company has been able to expand their customer base to Taiwan, India and Malaysia.

Furthermore, in FY2013, Pegasus Advance Engineering (‘PAE’) was set up to provide scaffolding works, adding to the Group’s integrated capabilities in electrical cum instrumental works and rotating equipment services.

Investment Thesis:

  • Current Market Price of S$0.068 is trading at a 3.72% discount to NCAV as of 1H2014
  • Over the last 7 years, business has been stable and is on the track of recovery

Fundamental Analysis:

(I) Earnings:

In FY2011 and FY2012, we see significant decline in earnings due to the near collapse in the economies and financial systems of several countries in the Eurozone. With fiscal austerity and substantial reductions of credit extensions to corporates, it resulted in high levels of unemployment which in turn translates to weaker consumer confidence levels; resulting in the significant fall in consumption. As such, many of Mun Siong Engineering Ltd (SGX:MF6)’s business partners turned cautious under such circumstances resulting in the decline in earnings.

Additionally, due to the foreign labor policies imposed in late 2012, it resulted increase in cost of employing foreign labor, adding pressure to the profitability of the Group. The double whammy of competitive pricing and rising business costs have inevitably caused gross profit margins to be squeezed significantly in FY2012, where we see approximately margins declining from 28.7% to 18.9%. However, given management’s prudent cost management, the Group was still able to report positive earnings, despite the slowdown in the economy.

With the recent results for 1H2014, net profits increased by approximately 278%, an improvement of approximately S$1.43 million as compared to S0.52 million in 1H2013. This has shown that the Group’s selective acceptance of projects and jobs have paid off with net profits surging 278% compared to the previous financial period. Furthermore, we see net profit margins improving from 1.3% to 5.2%. Once again, this proves the success of tight cost management coupled with commitments from the management to maximize resources allotted to them.

(II) Balance Sheet & Cash Flows:

Mun Siong Engineering

While the recovering operating results are a great sign, the investment thesis relies heavily on the balance sheet. Management has been steadily growing the NAV whilst paying down their debts. Ending 1H14, the Group has recorded a healthy cash & cash equivalent of S$20.67 million; an increase of 20% from the end of the previous year. As of 1H2014, NCAV per share stands at S$0.071, a slight discount of 3.72% based on the latest market price.

Recently 166,683,200 warrants were issued at a price of S$0.0015 with an exercise price of S$0.01. Net proceeds raised from the warrants issue would amount to approximately S$50,025.

(III) Financial Ratios 

Mun Siong Engineering

Looking at the financial ratios of Mun Siong Engineering Ltd (SGX:MF6)’s close competitors, we would observe that Mun Siong Engineering and KORI Holdings Ltd (SGX:5VC) stands out above the rest with the highest Current Ratio and lowest Debt-to-Equity ratio. Comparing the two, Mun Siong has a much lower gearing as compared to KORI Holdings, which probably explains the lower returns on assets as well.

Qualitative Analysis:

(I) Asset-Heavy Business Model: 

Mun Siong Engineering

In terms of comparison, KORI Holdings offers the best comparison against Mun Siong Engineering Ltd (SGX:MF6) in terms of ratios or market capitalisation. Mun Siong Engineering is producing 1.5 times the sales on approximately 20x the PP&E. In addition, Mun Siong Engineering requires almost 10x the amount of capex investment each year for an equivalent amount of revenue.

(II) Business Risk: 

Reliance on major customers. In FY2013, revenue from Mun Siong Engineering Ltd (SGX:MF6) 3 major customers totalled approximately S$43.4 million (FY2012: S$42.4 million). This translates to the 3 major customers contributing to over 80% of the Group’s yearly revenue, with each customer individually contributing to more than 10% of the Group’s revenue. Such as over reliance displays risks of over-reliance.

Foreign Labor Policy. Like many other labor intensive Singapore companies, Mun Siong Engineering Ltd (SGX:MF6) direct employed labor force comprises substantially of foreign workers. With the new foreign labor policies imposed in late 2012, it has resulted in an increase in cost of doing business in Singapore. While management has shown that they have been able to effectively management such cost by their selectiveness in bidding for new projects, ensuring maximization of profitability given their limited resources, this still does translate to problems in the future. Going forward, perhaps more capex investments have to be made to reduce their reliance on the labor force.


Mun Siong Engineering

In our valuations, we would be assuming that all warrants are converted into shares. With all warrants converted, Mun Siong Engineering Ltd (SGX:MF6) would be trading at a 27.4% premium to NCAV and a Price-to-Book ratio of 0.75x.


Mun Siong Engineering

Indeed, recent figures have shown that Mun Siong Engineering Ltd (SGX:MF6) is on the track of recovery with a capable management in steering the company through the various challenges they faced. In my opinion, with investing in net-nets, we cannot expect to find a company with a great business model coupled with superior earnings growth at such a cheap price. The crux with investing in net-nets would be finding a company that is stable and ensuring that our downside is protected. With Mun Siong Engineering, on the surface it is a company worth investing into – stable earnings, low debt levels, business recovering and most importantly protection on the downside. However, after factoring the recent issue of warrants, it may not be as cheap as it seems. Additionally, with business risks they face coupled with an asset-heavy business model, Mun Siong Engineering may not seem as great a buy as it initially was.

Disclaimer: The authors have no vested interest in Mun Siong Engineering Ltd (SGX:MF6)

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