Excerpts from analyst's report
KGI Fraser analyst: Renfred Tay
 AP Oil is principally engaged in business of lubricants and specialty chemicals. It operates 6 manufacturing plants. Photo: Company. Largely similar business. With the listing of United Global (United) on 8 Jul 2016, there is finally a local listed peer that we could benchmark AP Oil against. |
AP Oil has stronger margins than United. AP Oil has been reporting stronger gross margins than United for both their manufacturing and trading segments over the last three years. As a result, AP Oil saw higher profits in FY13/14 than United despite generating lower revenues. Although United’s profits overtook AP Oil’s in FY15, we believe this could be a one‐off, and should be lower this year. The narrowing of the margin gap in FY15 between the two was further exacerbated by a one‐off trading loss at AP Oil’s new trading subsidiary, Heptalink, in 2H15. We believe, AP Oil’s much wider margin gap over United in FY13/14 might have been maintained, otherwise.
| AP Oil | |
| Share price: 24.5c |
Target: 33c |
Stronger balance sheet => stronger acquisition firepower than United. AP Oil has a much stronger balance sheet that United, with net cash per share of S$0.19, versus United’s post‐IPO pro‐forma net cash per share of S$0.062. Both companies have plans to make acquisitions/investments to grow their business. AP Oil’s stronger balance sheet position allows it to have a larger option of targets, and even allows for leveraged acquisition since it has no debt.
| ♦ "Severely undervalued business" |
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Way cheaper than United. United’s headline P/E of 8.6x seems to be cheaper than AP Oil’s at first glance. A deeper analysis indicates a different story. AP Oil’s FY16F P/E, based on KGI’s EPS forecast is 10.6x; whereas United’s FY16F P/E is expected to lie in the range of between 9‐18x (higher expected earnings than FY14, but lower than FY15).
On an ex‐net cash basis, AP Oil is trading at only 2.4x FY16F P/E vs. United’s 7.6x. In terms of P/B, AP Oil is currently trading at a headline FY15F P/B 0.8x vs. United’s 4.2x.
Risk factors for AP Oil. 1) Customer concentration—top 3 customers formed 42% of FY15 revenue (top 2 formed 42% in FY14), 2) Oil price volatility could affect margins.
