FEDERAL INTERNATIONAL (2000): 5 takeaways from presentation

Koh Kian Kiong, executive chairman of Federal International (2000), fielding questions last week. Photo by Sim Kih FEDERAL INTERNATIONAL (2000) may yet achieve a breakthrough in its business model, going by a presentation the management gave last week. Here are five takeaways: 1. Recurring and profitable revenue stream: Aside from its core project-based trading business, Federal is looking to develop a business using proven Russian technology to recover oil from wells in Indonesia that are marginal or abandoned.  Initial results from a pilot study involving three wells have been positive. Analysts and investors at Federal's presentation last week. Photo by Colin Lum "They were dry and have been abandoned for more than 20 years. From zero, the wells are now each producing 100 barrels a day," said Mr Koh Kian Kiong, executive chairman and CEO of Federal.  The company is seeking profit-sharing arrangements (or, at least, leasing arrangements) with operators of such wells. The technology for enhanced oil recovery is widely used in Russia. To penetrate the Indonesian market, its Russian manufacturers have sought out Federal for its connections in order to exploit the 100,000 or so abandoned wells in Indonesia.  If successful, Federal will enjoy a "transformational" uplift from a business that is very scalable, said CFO Loh Chee Meng.

2. Procurement business segment: This is Federal's mainstay, accounting for more than 95% of sales since FY13.

Federal supplies oil & gas equipment and materials, and has an order book of S$90 million. Its annual revenue, on average, has been S$130 million.

Loh Chee Meng, CFO of Federal International (2000).
Photo by Leong Chan Teik Federal's strength as a procurement specialist is augmented through its 20.7%-associate PT Gunanusa Utama Fabricators, an EPCIC (engineering, procurement, construction, installation and commissioning) contractor which builds offshore platforms for oil majors. 

"We bid for a job together and when we get it, the consortium partners get a share. That's why the big manufacturers want to work with us," explained Mr Koh, in response to a question.

Federal's close relationship with PT Gunanusa is all the more strengthened by the fact that Mr Koh is also the President Commissioner of PT Gunanusa.

Federal, with over 40 years of experience, has strong relationships with suppliers, including big players such as CNOOC. 

Its Powerpoint presentation materials included an image of a letter dated 30 May 2016 from CNOOC Enertech-Pipe Engineering appointing Federal as its exclusive agent for a US$155.1 million subsea project.

3. Oil & gas play:  Federal reported S$21 million in net profit last year. Its exposure to the oil & gas industry is of a lower risk nature because the projects are in shallow waters. 

It is in talks to collect a downpayment before mobilising its land rig to a client.

It has an ongoing three-year charter (till Sept 2018 with an option to renew for another five years ) to CNOOC for its Federal 2, a FSO (Floating, Storage and Offloading) vessel.

Federal has a 30% interest in the charter and recorded a share of profit of $376,000 in 1Q2016. 

But its procurement business is mainly based on projects, thus revenue can be lumpy, as witnessed in the 1Q2016 results.

Revenue and net profit tumbled 60% and 92% , respectively, to S$23.1 million and S$1.7 million.  

4. Disposal of non-core assets:  Since FY13, Federal has divested non-core businesses. It is looking to divest its industrial water business in China and an associate, Federal JWR Energy, in Indonesia. The latter owns production facilities in Indonesia.

5. Healthy balance sheet: There is zero long-term debt. The $14.8 million of short-term debt (as at end-March 2016) are to finance the procurement business.

Federal had $20.6 million in cash and cash equivalents as at end-March 2015. Its current ratio was 1.2. 

Its NTA stood at 57.3 cents a share, which is substantially higher than its recent share price of 31 cents.

We believe that as the group continues to show improvements in its results in the next few quarters, investors may begin to re-rate the stock to its fair value of at least 45 cents, based on 0.8x P/B and an implied 3 FY15 P/E.” --  Joel Ng (KGI Fraser analyst)