XMH Holdings Rollin' in the deep

We initiate coverage with a Buy rating and TP of S$0.260. XMH enjoys a special position of being the exclusive distributor of multiple marine equipment brands in multiple countries. XMH was recognised by Mitsubishi as its largest worldwide distributor for marine diesel engines for the last seven consecutive years.

Riding on Indonesian energy demand growth. XMH counts half of the 90+ yards on Batam among its customers, and with Indonesia being an archipelagic country its demand for tugs and barges will grow in line with energy demand and GDP growth. Indonesia needs to increase its oil & gas production as well to reduce the burden of its fuel and energy subsidies. The country’s drive into offshore oil & gas, combined with the Cabotage law, indicates stronger demand for small-/mid- OSVs as well.

$51m in net cash, $68m market cap. EV/EBITDA 1.2x! Three quarters of the share price is net cash. Besides supporting the share price, this allows XMH wide latitude in M&A activities, to embark on new projects and/or to increase the dividend. All three are happening simultaneously, providing upside to estimates. Stripping out the cash, XMH is trading at a FY13F P/E of 1.7x. The EV/EBITDA of 1.2x makes XMH an ideal acquisition target, were management inclined to sell.

Negative cash conversion cycle. XMH requires deposits from customers before placing orders through to suppliers, and gets cash-on-delivery for its engines. Stripping out excess cash, working capital is a negative $7m. Cash conversion cycle is negative-45 days. This business generates money as it gets bigger.

Valuation: TP $0.260. DCF $0.450. We value XMH at 5x FY13F EPS of $0.026 plus the net cash per share of $0.13, arriving at a TP of $0.260. This valuation is backed by a DCF value of $0.450 at a WACC of 11.4%, more than double the current price. We believe it has the capacity to raise the dividend payout by 30% to 1.3¢ per share, implying a yield of 7.4%.