Fitters Diversified Diversifies Again

Last year when I first wrote about Fitters, it has 3 core businesses:

• Fire fighting service & products manufacturing
• Property, construction & engineering
• Renewable energy

Since Fitters diversifies into property development in 2010, its top & bottom lines improve tremendously. Property segment has contributed 51% & 77% to its revenue and EBITDA respectively in FY2013.

Obviously it was a good move.

With hot cash from property development, Fitters has set a minimum 30% dividend payout policy from FY2014.

       FY13 Segment Results

As its high GDV (RM450mil) Setapak projects are near to completion (FY14Q3), I think it is not easy for Fitters to sustain its financial performance in FY14. It needs to keep launching more projects and achieve high take-up rate at the same time.

I temporarily removed Fitters from my alert list since early this year mainly because I think it is too dependent on property which I try to avoid in anticipation of a slow down in property market.

Fitters Quarterly Results By Segment

FITTERS	FY14Q1	FY13Q4	FY13Q3	FY13Q2	FY13Q1
Revenue	116.9	159.0	131.8	111.3	69.8
PBT	12.6	16.5	13.4	16.4	11.7
PBT%	10.8	10.4	10.2	14.7	16.8
PAT	9.3	11.4	10.1	12.3	8.5
Fire service revenue*	31.5	48.7	40.9	37.0	32.5
Fire service PBT	2.7	5.0	2.9	2.4	3.2
Prop revenue*	72.3	118.6	94.1	89.4	69.2
Prop PBT	9.4	9.7	9.5	13.4	9.6
Energy revenue*	37.0	44.0	41.9	24.6	3.9
Energy PBT	1.2	2.0	1.6	0.9	-1.2

* include inter-segment sales

So far Fitters has 3 major projects in the pipeline which are:

• Zeta D'Skye condominium @ Jalan Ipoh (GDV RM169mil)
• Zeta Eco Park @ Cyberjaya (GDV RM500mil)
• Zeta Residence @ Rawang (GDV RM300mil)

Zeta D'Skye has been launched in the final quarter of last year and received good response in which more than 80% were sold. It should be a joint venture project but I'm not sure how many percent Fitters has in this JV.

Anyway Zeta D'Skye is a relatively lower GDV project compared to the LOFT. Fitters unbilled sales stands at RM173mil after the first quarter of 2014.

       Current property development - RM63.9mil remaining for LOFT

By looking at previous quarters' contribution from property, I think Fitters may face a slow down in property segment if no other projects are launched successfully within this year.

Zeta Eco Park is also a JV project which was said earlier to be launched in early 2014 but obviously nothing has been heard so far. It is not even in Fitters official website. Its GDV is high at RM500mil though.

The 50-acre leasehold Zeta Residence in Rawang offers landed gated & guarded homes but is still in planning stage and might be launched in phases by FY14Q4.

       Zeta Residence @ Rawang

It seems like Fitters is over-dependent on property for its growth, as its fire service segment looks stagnant in FY13 and profit margin from renewable energy remains mediocre.

At this point Fitters's future in term of growth seems to be not so exciting.

FITTERS	FY13	FY12	FY11	FY10
Revenue	472.5	410.9	446.5	189.8
Revenue growth %	15.0	-8.0	135.0	50.4
PBT	55.8	39.1	29.7	18.9
PBT%	11.8	9.5	6.7	10.0
PAT	39.2	27.9	22.2	13.2
PAT growth %	40.5	25.3	68.0	65.0
Fire service revenue*	157.1	153.7	129.9	61.8
Fire service PBT	13.2	13.8	10.9	6.6
Prop revenue*	373.1	171.0	179.3	97.8
Prop PBT	43.4	25.4	16.1	10.3
Energy revenue*	114.4	181.0	236.7	29.9
Energy PBT	3.2	-3.2	2.4	-1.9
EPS	13.46	12.42	10.26	6.47
NTA	93.71	71.85	74.13	63.17

* include inter-segment sales

Nonetheless, Fitters decided to diversify again.

In March 2014, Fitters announced acquisition of 65% stake in Molecor (SEA). 

Molecor is a Spanish company which manufactures and distributes patented PVC-O water pipes, which is said to be superior to normal PVC and steel pipes.

Molecor (SEA) holds the exclusive rights to manufacture and distribute these PVC-O pipes in South East Asia.

Fitters plans a capex of RM80mil to build a PVC-O pipes manufacturing plant in a 4.5 acres site in Gebeng, Kuantan. It will install 3 production lines initially and then another 3 lines will be added in 3.5 years time.

Second plant with 4 lines is planned to be built in Kota Kinabalu, and it may expand the production facilities to Thailand and Indonesia in the future.

Currently Fitters will import the pipes from Spain while waiting for its first plant to be completed tentatively in September 2014. Fitters plans to have 10% market share by the end of year 2015.

       Molecor PVC-O pipes 

How much can this new segment contribute to Fitters?

The management mentioned in Mac14 that it hopes the PVC-O pipes manufacturing segment can reach the revenue level of fire service segment by the end of 2015 and then double it in the future. In FY2013, fire service segment registers revenue of RM157mil.

It is also mentioned that the profit margin for PVC-O pipes is about 20%. However, I'm not sure whether it is gross, pre-tax or net margin.

Fitters is able to get pioneer status for the manufacturing of PVC-O pipes for a period of 8 years and is entitled to 100% tax exemption.

If we consider a net margin of 12% for the PVC-O pipes, then RM157mil will give RM19mil of net profit.

As Fitters holds 65% in Molecor (SEA), it will be a potential RM12mil annual net profit for Fitters. This is about 30% of overall FY13 net profit for Fitters.

The management said that it targets to double the pipe manufacturing revenue in the future after FY15 so its future contribution should not be overlooked.

Anyway, it is always easy for the management to make prediction and set sales target which may not materialize in the end.

It is learnt that Fitters has not acquire any contract yet for this new PVC-O pipes segment. It expects to sell this products to government and township developers.

Besides, Fitters plans to list its wholly-owned subsidiary in renewable energy Future NRG on Catalyst which is a sponsor-supervised board in Singapore. The earning contribution from this segment is only little.

Fitters's share price has gained more than 30% since we stepped into 2014, is it still undervalued?

FY13 is a fantastic year for Fitters in which its revenue and PATAMI rise 15% and 42% respectively YoY thanks to its property segment.

Base on FY13's PATAMI of RM39.2mil, its EPS will be 12.6sen which means it is only trading at a PE of 8.2x at current share price of RM1.03. Its latest net asset per share is at RM1.

Nevertheless, whether its property segment can keep up with previous year's performance remains a concern as explained above.

A good point is, its property project in Rawang is landed which should be more resilient in a soft property market.

Its development in Cyberjaya is still a mystery to me.

The new PVC-O pipe manufacturing segment is unlikely to contribute significantly in FY2014, and it is also not known how successful the management can secure contracts for it.

If this new business really can achieve the revenue level of its fire service by the end of FY15 and then double the figure later, then Fitters will be a true undervalued stock even though its property & other segment fail to grow.

But can Fitters achieve the target?

I better put it back into my stock alert list.