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Hiap Seng Continues To Leak With Low Margins
Low margin continues to be a problem for Hiap Seng in the long run.
Outlook on the sector remains tough amidst rising cost and increased competition.
Don’t be fooled by the cheap valuation ratios. What looks cheap may not be cheap afterall.
Hiap Seng Engineering Ltd is a specialist integrated engineering group for the oil-and-gas, petrochemical and pharmaceutical industries.
Q4 2014 and FY 2014 Financial Results
Hiap Seng’s revenue for Q4 2014 increased 46.9 percent to $68.9 million from $46.9 million in the Q4 2013. Hiap Seng recorded a net profit attributable to shareholders of $1.1 million in Q4 2014, as compared to a loss of $4.5 million in Q4 2013. The better performance resulted mainly from the increased revenue and marginally improved gross margins in Q4 2014.
For the full year ended March 31, 2014, Hiap Seng’s revenue increased 9.1 percent to $259.0 million from $237.4 million for the previous financial year (“FY2013”). The increase was attributable mainly to higher recognition of project revenue.
The net results attributable to shareholders declined from a profit of $7.5 million in 2013 to a loss of $3.6 million in 2014 primarily due to cost overruns in certain projects, escalating labour costs as well as the absence of a gain of $3.8 million in 2013 on measurement of previously held equity interest.
A particular portion of the income statement that got me thinking was the increase in cost of sales.
Cost of sale grew more than revenue in FY 2014. Cost of sales grew by 13.1 percent while revenue only grew by 9.1 percent. This effectively means that gross margin of Hiap Seng lowered in the latest financial year.
Margins Pale In Comparison To The Industry Average
Hiap Seng has very low margins in comparison to its peers in the industry. Hiap Seng trails the industry average margins by a distance. This is even more evident in its five year average margins which lag behind the industry average by about more than half. In terms of fundamentals of Hiap Seng’s ability to generate profits, I am not convinced at all.
Business Outlook
The outlook for the oil-and-gas and petrochemical industries which Hiap Seng serves still remains positive. However, in view of keen competition, escalating labour costs and potential cost overruns on certain projects, the Directors of the Company are not optimistic about Hiap Seng’s performance for the current financial year ending March 31, 2015.
Hiap Seng’s two contract wins worth approximately $57 million to provide piping and equipment installation works, as well as mechanical, equipment erection and structural works in Singapore, were secured in 2QFY2014 and scheduled for completion in FY2015. The turnaround maintenance contract in Vietnam, secured in 3Q2014 and worth approximately $12.5 million, is scheduled to both commence and be completed in 1QFY2015.
Finding The Right Price
As how Warren Buffett would say it if he was here, price is what you pay but value is what you get. Despite having a low margin in an increasingly saturated market, should Hiap Seng still be on your radar?
#Bearish
The answer is still no. Unless we wake up to major announcements from Hiap Seng, I don’t see a reason for me to be excited about Hiap Seng.
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