In recent years, GSS Energy has not had as much to cheer as it has now. Its precision engineering business is going great guns while its oil & gas business is about to produce first oil.  CFO Ng Say Tiong (left) and CEO Sydney Yeung. NextInsight file photo The market has re-rated the stock (15.8 cents): It's up 86% year-to-date. But management pointed out at a 1Q2017 results briefing last week that its precision engineering business is trading at a big discount to peers (see table below). Furthermore, the current stock price implies that its oil & gas potential has yet to be accorded any value. |
Takeaways from the briefing:
|
S$’m |
1Q17 |
1Q16 |
Change |
|
Revenue (precision engineering segment |
21.7 |
16.9 |
28.3% |
|
Net profit (precision engineering segment) |
1.9 |
1.4 |
32.9% |
|
Net loss (oil & gas segment) |
0.87 |
0.7 |
|
|
Group net profit |
1.0 |
0.7 |
58.5% |
1. The 1Q2017 net profit of the precision engineering business came in at $1.9 million, up 33% y-o-y. Annualising it will give a profit figure of about $8 million, similar to 2016 (excluding one-off gains).
But 1Q historically has been the weakest quarter, so one may expect full-year 2017 earnings to come in higher y-o-y.
2. New demand: Arising from Indonesia's new law on local content, GSS Energy expects its Batam plant to benefit from increased outsourcing by global manufacturers of devices such as smart phones.
Moulding line in GSS Energy's factory in Batam. Photo: Company
3. Bigger capacity: Around mid-2017, GSS Energy will move into a new plant in Changzhou, China, with a capacity that is double the Changzhou factory it will relocate out of.
The capex is more than covered by compensation from the goverment which asked GSS Energy to relocate its factory.
In addition, in Batam, GSS Energy is negotiating to buy a large plot of land to build its own factory to replace the plant that it is renting currently.
4. Scaling up: GSS Energy has identified potential partners to enable it to expand and scale up, and will seek to move relationships to the next level.
|
Peer comparison |
|||
|
Company |
Market cap (US$’m) |
PE ratio (trailing 12 mths) |
EV/EBITDA (trailing 12 mths) |
|
GSS Energy |
55 |
7.0 |
1.9 |
|
Venture Corp |
2592 |
18.3 |
10.7 |
|
EVA Precision |
346 |
15.8 |
7.8 |
|
UMS |
283 |
42.2 |
4.7 |
|
Jentech |
260 |
15.0 |
3.7 |
|
Elec & Eltek |
247 |
7.9 |
2.7 |
|
Sunningdale |
238 |
7.8 |
9.7 |
|
Fu Yu |
171 |
18.3 |
4.5 |
|
Frencken |
142 |
6.6 |
3.6 |
|
Fischer Tech |
108 |
15.0 |
2.5 |
|
Spindex |
10.4 |
11.3 |
2.4 |
|
CEI |
79 |
10.4 |
2.6 |
|
Cheung Woh |
46 |
17.6 |
5.2 |
|
Average |
377 |
15.5 |
5.0 |
|
Source: Bloomberg, 23 May 2017 |
|
||
5. Undervalued: The current market cap of GSS Energy is S$78 million, or about 7x trailing PE. It has net cash of nearly $12 million.
No value appears to have been accorded to its oil & gas business in the Trembul Operation Area.
To value an oil & gas business, the industry practice is to refer to the 2P reserves which, in the case of GSS Energy, amount to 24 million barrels (base case). 
Suyulianto Badung Tariono heads GSS Energy's oil & gas division. Take 10-15% of the market price of oil and then multiply it by 15 million (the low case) and one gets about US$75 million as the market value of the reserves.
6. First oil: Production is expected to start in 4Q this year under a contract awarded by Pertamina in Nov 2016.
GSS Energy can recover capex and opex spent on this project from the sale of the oil to Pertamina, after which the profit will be shared between the two parties.
As GSS Energy's financial statement says, "Other receivables and deposits" as at 31 March 2017 was S$1.32 million. This is an increase of S$0.56 million from 31 Dec 2016, mainly attributable to an addition in recoverable cost under an approved budget under KSO arrangement.
