[AGM]: 5 things I learnt from Nordic’s 2018 AGM

Hello everyone, sorry for the delayed posting of Nordic’s AGM report as I fell sick. Nordic AGM was held at the auditors’ office. I would say about 20 shareholders turned up for the AGM. Here’s what I learnt from Nordic’s AGM.

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1) On management

The management are experts in their own field of work that they do. From the way the Chairman replied to shareholder’s questions and from my 1 to 1 conversation with Ms Teo one of the executive director, they are all very clear about the Nordic’s business. Chairman also mentioned that he is very focus on generating cash then keeping assets in the company. The independent directors also shared that Chairman have been very forthcoming and would not hide any important decisions from the board. One of the ID said that this is reflected in the successful M&A track record that Nordic has.

2) On their businesses

Chairman shared that the upstream activities in the O&G sector still remains weak but there are more opportunities in the downstream where Nordic have been building up their capabilities in through all the different acquisitions.

Nordic’s business started with providing services in the upstream of the O&G sector before they realise the more lucrative downstream sector. Ms Teo shared that this shift have been pivotal to Nordic’s business and how they manage to stay competitive despite the downturn in the whole industry.

One example that Ms Teo mentioned is how Nordic came in to provide services for major oil refiners like Exxon Mobil and Shell in Jurong Island. She shared how the tight security in Jurong Island meant that these big companies could only source for local companies that are already operating within the island which Nordic was in. This also meant that there are high barriers to entry for any other companies who want to come in to eat their lunch. Due to the high expenditure involved in running their oil refinery business, these big companies cannot afford to have any down time and hence will definitely sought for good services that companies like Nordic provides to ensure safety of their workplace and machineries.

3) On business outlook

Chairman shared that he will continue to strive for efficiencies and synergy between all their acquisitions so that he can continue to bring down the cost. One example he mentioned is how there used to be HR department in every subsidiaries whereas now there is only one HR taking charge of all the different subsidiaries.

For businesses that are not doing well, especially those serving in the upstream, Chairman said that he will continue to right size the company so that they are not making any losses.

Chairman also shared that they continue to pursue the cross-selling strategy to their clients. By bundling up various services in their subsidiaries they are able to provide whole solutions to their clients. Ms Teo also mentioned that many of their clients appreciate the bundling packages as a lot of them would rather not engage you if you are “just doing scaffolding”. Hence, bigger companies engage them to provide whole solutions.

4) On properties & cash

Chairman shared that they have sold 2 out of the 4 properties they have put on sale. One shareholder asked him why he is selling it now when the property prices are not that good. He went on to reply that he rather keep money in cash then in assets.

Nordic’s war chest remains big at about $40 million, and Chairman believes that give them a good buffer to acquire any company that fits into Nordic’s game plan. As of now, the Chairman do not see any potential acquisition after Ensure.

5) On share buyback

I asked the management on what grounds does the management deemed that they should buy back shares. The Chairman said that they will buy back shares, either via the company or in their own capacity when “they feel that the share price does not reflect the true value” of the share. They do so in a systematic way and Chairman stressed that he will not use the company’s money to pursue aggressive buyback such that their cash needed for their core businesses gets affected.

Perhaps that’s why Nordic seldom conducts share buybacks but we could see their Chairman and Ms Teo scooping up shares in the open market. The last price that one of the management bought from the market is around $0.57. That could mean that given the current price the management still feel that the share price is below the intrinsic value.

In conclusion,

Nordic continues to live up to the reputation of a well-run company who defied the odds being in the O&G sector. Unlike their counterparts who have posed losses and some even going bankrupt, Nordic have been able to steer clear of these challenges. I believe this will only make Nordic stronger going forward. To share something I heard, the management is very excited about Ensure as there are strong demand for Ensure’s services by their customers. They have never seen such a good acquisition before, the margins are good and there is relatively few competitors. I will leave it at that and you can go decipher what that means. Haha!

PS 1Q results to be out in 9 May as shared by Chairman

 

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[AGM]: 6 things I learnt from AEM’s 2018 AGM

Hello everyone, this is the report for AEM Holdings. The AGM was held at the Serangoon Gardens Country Club. I would say there are at least 50 shareholders who turned up. The ballroom was filled. The AGM began with the Chairman sharing his presentation slides on AEM, before questions were asked. Here’s some takeaways from the AGM.

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On management

Chairman stated that AEM is “Build to last and not build to flip.” This can be seen from the pipelines put in place to grow the company further with the recent acquisitions and upcoming new product. I would say that the management are experts in their respective domains and Chairman Loke is like the conductor directing the whole band.

On HDMT

The HDMT is the flagship product sold to their key customer Intel. Chairman used the analogy of selling a car to someone but if he or she requires the car for other purpose like sports, they can choose to change the wheels and certain parts of the car to function like a sports car. The HDMT works the same way, it supports the testing of many chips that Intel produces except memory chips and for them to use the HDMT for different purpose they have to buy different kits to fit onto the HDMT. Furthermore, as the customer uses the HDMT, they would require to purchase consumables for the HDMT (think of it like changing your Gilead shaving blade after multiple usage) that again is a recurring revenue from the HDMT. All these consumables, kits are of high margins to AEM and are recurring products that Intel would have to buy in order for the HDMT to work.

The ramp up of the HDMT continues but Intel is giving them shorter lead time. When AEM was much smaller, Intel use to give them much more time from order to delivery. Now, seeing that AEM have become more established the lead time have fallen to about 4 months. Hence it was stated that they do not have visibility of the Q4 sales orders. If we were to work backwards Intel would place the order earliest June for it to be delivered in Q4.

Chairman also shared how the HDMT have kicked out other competitors test handlers and 2019 their key customers will be replacing all the other competitors’ machines with AEM’s. This means that sale of HDMT will continue into 2019 albeit at a slower pace compared to 2018. The consumables and kits segment will be expected to pick up nearing the end of the year as more HDMT are being set up in Intel.

On customer risk and diversification

One shareholder asked if Intel can engineer their own “HDMT” and get rid of AEM. In response to that Chairman said that AEM working relationship with Intel have spanned over 15 years, Intel sticked with AEM handlers even when it was in a rough patch back in 2011. Chairman also said that the HDMT is hard to be copied as many of the processes within the HDMT are protected by intellectual property (IP). Chairman expects this “sticky” relationship to continue into the future.

One shareholder asked if AEM can sell the HDMT to another customer besides Intel. To that the Chairman said that they can’t sell the current product to competitors as its like shooting their own foot. However, AEM can use their know hows and rebuild another test handler suited to the needs of the other customer.

The Chairman describe that Intel will become like their cash cow even if they do not use a new test handler, as the consumables still needs to be replaced. With the strong track record working with Intel, this can open up new doors when they approach other customers with the services their other subsidiaries (like Afore, Inspirain) provide. Diversifying into other areas of testing requires time as shared by the Chairman.

On Afore, Inspirain and Smartflex

Afore is a MEMS test equipment company that offers test handling solution mainly for automotive, industrial and consumer application. They are the industry pioneer and global leader in wafer level MEMS testing (wafer level is one of the smallest component in any product that is manufacture)

They have about 50% market share in the field they are in due to them being the lowest cost provider in the market. To put it in layman terms, Afore is good at testing things that are super small imagine a motion sensor in your Fitbit or in your car. And to be able to test something this small is not an easy feat which requires a lot of expertise. Afore claims to be the pioneer in offering such service.

Afore’s product offerings include selling of the MEMS test handlers and test cells to customers, testing services for other clients, tailored equipment and R&D services for the MEMS industry. For example, their Kronos test handler is the only wafer level test in the world for motion sensors with real stimulus.

For Afore they are pushing to offer testing at wafer level and at system level which means testing the product after it have been assembled. They are also exploring testing using cryogenic prober for application in quantum computing.

For Inspirain is into network infrastructure testing and measurement, they produce testers to test radio frequency in cables. The key in this industry is to provide the testing at the lowest cost and at the fastest speed. Their new product the TestPro100 is a handheld tester which is good for manufacturing testing. It is currently undergoing mass production and have received very positive response from big clients in manufacturing. AEM aims to leverage on their network and distribution to make this product a success.

For Smartflex, Chairman shared that this remains as an investment and he does not actively build this segment of the business. Nonetheless he believes that their know hows in the smart cards and SIM cards will reap benefits soon.

On new product AMPS

AMPS which is going to be another product apart from their HDMT, this product is going to be modular and configurable. This means that AMPS is a simple platform that can be modified to fit whatever needs their customer may have. It is believed to be easily scaleable as well. Currently they are at the marketing stage and intends to work with customers from planning to pilot and eventually adoption of the AMPS. This will be an interesting development to watch.

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On Industry trend

Chairman believes that despite the cyclical nature of the semiconductor industry, our demand for semiconductors in areas like IOT, Big Data etc will continue to drive their demand in the future. All these are mission critical as more technology comes into our daily lives. For instance, chips used in autonomous driving cars should not be allowed to fail as safety is paramount. All these mean that testing of chips becomes something all manufacturers have to do and they would have to abide to a high standard of testing to ensure the product is good & safe. This represents opportunities for AEM to scale and position themselves.

In conclusion,

I would say AEM have an exciting future ahead for them. It will take time for their acquisition to build synergy and grow to be a major revenue contributor in AEM. Nonetheless, the next 1-3 years will be interesting to see how they can continue to surprise us with what they can do.

[AGM]: 6 things I learn from Tiong Seng’s AGM

Hi everyone, this is my report for Tiong Seng AGM, held today at SAFRA Jurong. There was only a handful of investors there. I would say less than 20 of them turned up. They started by sharing with us the FY 2017 financial results and the outlook for Tiong Seng before going into the resolutions and Q&A. Here’s my take on what transpired during the AGM.

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1) On management

Management believes that profits is more important than revenue. This is in response to my question on their declining order book and the lack of contract wins in their construction sector. CEO said that they would rather not be aggressively submitting tenders that Tiong Seng finds it hard to make money from. On that front, management remains cautious and careful in their bidding attempts. The Chairman shared that they do bid for projects but they do their best not to push down the prices too much such that it puts a tight pressure on their margins.

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2) On Construction segment

Order book of about $500 million as of 31 Dec 2017 which includes of 8 ongoing projects lasting till 2020. CEO believes that Tiong Seng’s technology focus have position them well to ride on the government continued push towards adoption of technology in the construction sector. CEO highlighted that government have been very happy with the past 5 years whereby there have been a productivity increase of 2% in the construction sector with minimal labour growth. The government will continue to push for technology adoption in this sector with the aims of increasing productivity and reducing labour needed in this sector.

CEO believes that they are well poised to take advantage of this as they have amass a suite of technology that will give them an edge compared to others. Recent announcement on how they have reduce the building time needed for the social housing project in Myanmar is a strong demonstration of their capabilities. CEO is positioning Tiong Seng to become an integrated project deliverer.

“Integrated project delivery (IPD) is a collaborative alliance of people, systems, business structures and practices into a process that harnesses the talents and insights of all participants to optimize project results, increase value to the owner, reduce waste, and maximize efficiency through all phases of design, fabrication, and construction.”

By moving upstream to help their clients from conceptualisation and designing of their buildings. They are able to help their customers reduce waste and improve efficiency during the whole process. Also by moving upstream, from helping them with conceptualisation to designing, that could translate into contract wins for other business segment as well due to the high switching cost.

3) On new business segment

After amassing a suite of technology in their arsenal, Tiong Seng have come out with a new business segment to consolidate all their technology and offer it as a service to their clients. Their technology like PPVC, PBU and Cobiax just to name a few are being repackaged into this new business segment. Tiong Seng plan to sell this services to clients, or even to expand overseas just like how they did in Myanmar. CEO also mentioned that there have been some clients coming to them to ask for their advices before bidding for any land in Singapore.

As for their PPVC facilities in Singapore, Malaysia and Myanmar, the Singapore factory just finished the JTC project. Whereas, the  Malaysia facilities are at 60% capacity for precast and 50-60% for the tunnelling project for Malaysia. For Myanmar, they are still waiting for new project after recently concluding the social housing project in Yangon.

This Engineering solutions business segment will be a new leg of growth for Tiong Seng.

4) On recent partnership with ARCStone

The recent announcement of their partnership with ARCStone to collaborate and come out with a IOT platform to further systemise their PPVC factory through creation of TSConnect. TSConnect will be a manufacturing platform for construction to be used in their PPVC facilities.

CEO was speaking on how if we can envision PPVC factory just like any manufacturing facilities, by incorporating IOT and certain systems they will be able to further reduce their cost of production and reap efficiencies. Furthermore, CEO hopes to bring this down to the construction site as well. If the construction site can resembles that of a assembly site in a factory, a lot of these processes can be further improve to make the whole construction process much more efficient. That’s the direction they are heading with the partnership with ARCStone.

5) On property development

CEO shared that property development remains challenging in China in response to a shareholder question on why the China property development have not been bringing in good profits. Regulations placed by Chinese government for instance capping the selling price per unit, puts a strong cap on profitability. Hence, they had not been buying more land there since 2014, and have since move their focus to Singapore with the purchase of 2 sites recently.

The two sites are expected to launch in 2H2018 and 2019 respectively.

6) On share price undervaluation

CEO continues to believe that share price for Tiong Seng remains undervalued. CEO said that their book value is at $0.605 which is very undervalued compared to their current share price. An example given by the CEO is that most of their assets have been fully depreciated and are still serving them well. Furthermore their properties are valued at book cost and not market price which further adds on to the current book value.

It seems that share buyback should be continuing with the renewal of share buyback mandate in this AGM.

In conclusion,

Tiong Seng is entering into an exciting phase of development by introducing a new business segment to pivot away from their usual business segments of construction and property development, Nonetheless that also presents a lot of challenges ahead in building up this new business segment.  As of now, industry trends are still favours Tiong Seng. CEO expresses that contractors are predicting a slew of new projects (from recent enbloc activities and government projects) coming and hence are not aggressively bidding down the price. The increase in private property prices continues to be sustained and in favour of Tiong Seng property development business in Singapore.

PS I am vested, DYODD

PPS Buffet was Stamford Catering

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My previous posts on Tiong Seng:

  1. What has happen to Tiong Seng so far?
  2. Tiong Seng, a sleeping giant?

[AGM]: 6 Things I learn from GSS Energy 2018’s AGM

Hello everyone so this is the much anticipated report on GSS Energy’s 2018 AGM. It was held in their office at Ang Mo Kio. I would say about 20 over shareholders turned up and packed in the small meeting room in their office. The meeting started with addresses by both the Chairman and then the CEO before we started asking questions to the management. So here’s my takeaways from attending their AGMs!

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1) On management

Management continuously pledge that they are conservative in nature and do not intend to take on heavy debt to grow their business. They are very cautious in their finances and always seek ways to grow the business in unconventional ways. Quoting what Chairman and Independent Director said, “Anything we invest into we will think carefully.”

2) On dividend and FX policies

Management guided that although the dividend policy is not confirmed they are intending to give out dividends once the oil business gets into shape and that could be as early as the end of FY2018. For the sake of transparency, GSS felt that they should declare their intention to adopt a dividend policy to the shareholders.

On FX, the management have acknowledge that foreign exchange loss is a concern to them. But as of now, they have yet to be able to justify the financial costs required to adopt a hedging policy just to hedge their currency risks. They would rather be focus to build on the twin business at hand. Management also said that they are looking at a FX policy should they find one that is reasonable or if their exposure to a currency gets really big.

3) On their oil business

GSS CEO explained that he is very confident that monetising of the oil will be carried out in this FY. To give a rough estimation, he is looking towards the second HY that oil will be monetise. CEO is also careful to tell investors that he refrain from giving a firm timeline as to when the monetisation will occur as he explained that the oil business can be very unpredictable.

CEO also highlighted their game plan for their oil business. After the sharing from CEO and speaking to the key personnel after the voting, I have gathered that GSS changed their game plan to enter a workover well P1 because of their close proximity to SGT-01 which they are postulating that it will yield roughly the same oil profiles. (If you are unclear about SGT-01 and P1 read my write up on GSS here)

One of the key personnel I spoke to told me that they all know that the oil is there, just that further analysis still needs to be carried out. The KP also spoke about how close their relationship with Pertamina is, being one of the few companies that are committed to co-develop oil fields together with Pertamina. He highlighted how many companies took a very long time to go from the awarding of concession contract to production, whereas GSS only took 1 year to do that. On that note, Pertamina is very happy that GSS is committed and deliver their ends of the deal. That could possibly culminates into future opportunities for collaboration.

But as of now, the oil wells are currently still not producing oil. CEO also guided that in the oil business nothing can be set in stone, they will have to modify their game plan according to what kind of results they yield from their analysis.

For now, they are looking to monetise the sweet gas in SGT-01 and enter well P1 that is near SGT-01. Overall the technical team in Indonesia are optimistic about the situation over in the Trembul oilfield.

An interesting comment I caught was that they are looking to invite potential partners to help drill the well on a success basis. Meaning theses drilling partners will only get paid for their services if there are oil in that particular well they are working on.

4) On their PE Business

The management is also very optimistic about their PE business. They are running at almost full capacity now and they are having more orders coming in for them to fulfil. In the first 4 months of business, which are the dull months for their business, they are doing much better. Hence they are expecting their PE side to grow substantially this year. Their recent work trip to North Asia also brought out many positives for them.

With that the company is looking to expand their capacity by building a new factory in Batam, where payment will be made in instalments over 5 years and the asset will be owned by GSS. Many of their clients are asking them to commit to the long term and hence they are looking at capacity expansion.

The management is also looking to create more synergy between all 3 factories they have to deliver a whole solutions to their clients. My talks with the management also highlighted that the Indonesia’s Law on local content has been a unique value proposition they have for companies hoping to bring their products into Indonesia. GSS is also seeking to diversify their product offerings so as to diversify away from the Consumer Electronics division which takes up the bulk of their orders. (60% CE, 20% Automotive and 7-8% medical)

CFO also revealed that on an annualised basis for this year they are looking at 30 – 40% of new customers tapping on their PE business offerings. (New customers is defined as new orders for a different product by an existing customer or from completely new clients)

5) On spin off of PE business

CEO said that spin off of the PE business is another kind of possibility they are considering as currently the twin model approach have been serving them well (which means cash flow from the PE business is used to support the oil business)

However, CEO mentioned that “Ultimately, we should be separated, in order to restructure the business.” He did say that SGX requires that the oil and gas business to be sustainable and have some form of stability before allowing a spin-off to take place. CEO also hinted that the discussion with SGX on the possibility to spin off the PE business could be as early as next year when there are some track record from the oil business.

6) On Q1 results

CEO, CFO and one of the KP I spoke to told us to expect a fairly good and reasonable Q1 results from their PE business. By gathering their optimism shown in the first 4 months of the business I am expecting their PE business to record about 15% to 20% growth in revenue. Perhaps if we were to take it in totality, I am guessing their oil business will continue to pull down the overall net profit due to the fact that the oil business is still not cash making. But I am expecting 2018 Q1 results to be better than 2017 Q1 results.

 

In conclusion,

what I feel is that the management know what they are doing and the direction they want to head towards. They have done tremendous work in developing strong relationships with their clients and partners which I believe will only work towards their advantage. I continue to be highly optimistic on the outlook of GSS Energy given the strong short term catalyst of monetisation of their oil business backed by a strong management team who knows what they are doing.

[Portfolio]: Added AEM

The past few weeks have been yet another rocky few weeks in investment. With Trump threatening trade tariffs on China, the market have went up and down like a seesaw. Our gains from the previous few addition including Yanlord and Capitaland got wiped out. Thankfully good fundamentals have manage to hold the price steady despite the broad market decline and now its on its way to rebound from the recent lows.

Because of this volatility, it presented another opportunity to add a solid stock in our portfolio and its none other than AEM Holdings.

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Strong sales order momentum

Sales order from AEM’s customer continue to push up their order book. Recently, AEM announced an increase of 67% sales order from its customer for delivery this year, which brings up the total sales order to $192 million.

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We believe that further sales order increase is very likely in the coming year which will provide further upside to this stock. Given that AEM have always been hitting its guidance call, if we were to use $42 million profit before tax to calculate, that would be a PE of 10.1 at the price of $6.45, which is still rather undervalued for a growth company like AEM.

Diversification away from key product

AEM’s dependance on the HDMT to drive sales have been the key to their growth for the past 1 year. This HDMT will be relatively less significance in their revenue going forward so its good that AEM have made a few key acquisitions this year to diversify their revenue streams into providing other forms of testing solutions to clients.

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With a strong recovery from the recent drop in price, we believe AEM is fundamentally strong enough to recapture their recent high of $7.59 based on the good news mentioned above.

[Portfolio]: Added Capitaland & Yanlord Land on weakness, stop out of Emperor Capital

The recent Dow sell off had sent shockwaves around the world. The sell off has triggered the 10% stop loss for Emperor Capital. Also, the sell off created many major opportunities for us to pick up undervalued stocks, mainly, Capitaland & Yanlord Land.

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Capitaland have been on our watchlist for a long long time. It’s a strong blue chip stock in the property development industry which we believe will benefit from the recovery in property prices this year. Furthermore, Capitaland is grossly undervalued for a blue chip company. With a PE of 9.75 and NAV of $4.38, it gives us a huge margin of safety at our entry price of $3.60.

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As we can see from Capitaland’s chart, it has hit a high of $3.87 in January 2018 in speculation that the property sector in Singapore will rebound. The trend is similar across many developers like City Developments, UOL and many more. The Dow panic caused it to drop all the way down from the peak to the support level at $3.45. Recovery in prices and frequent share buybacks by the Capitaland’s management up to $3.67 per share prompted us to enter this stock with it’s juicy margin of safety and potential rerating of the stock.

yanlord land

As for Yanlord Land, it was a case of insider buying and the perfect Dow crash that prompted us to look at it. Yanlord Land is also a property developer listed in the SGX, however most of their businesses are in mainland China. As it is an S-Chip, we were especially careful when researching and limited our risk by allocating a smaller portion to it.

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The CEO bought back the shares aggressively from $1.58 all the way to $1.886 spending more than $5 million on Yanlord shares. That prompted us to dig deeper into the company. We realised that their 9M2017 results were actually fantastic and we were speculating that the FY result will be even better considering the CEO major buying of the shares.

Also with a PE of 5.7 and a NAV of $2.252, it presents us a juicy margin of safety as well. Knowing that the CEO bought so many shares, we entered Yanlord at $1.60. True enough, the FY results was good and they declared a higher dividend for the year. What we are speculating for Yanlord is that the CEO could be trying to privatise the company given the good business and how undervalued his company is right now. Only time will tell if this is true.

In conclusion,

having a watchlist of stocks and to capitalise on the stock market panic have gave us a favourable entry into these 2 stocks. As the saying goes, buy when others are fearful and sell when others are greedy. In actual fact it is never easy to do so. It was actually the clear margin of safety that gave us the conviction to enter the market when it is still suffering from the sell off.

[My Story]: Investment outlook for 2018

We are one week into 2018 and most of us would have set our New Year’s resolutions for the new year! And it’s important to do that for investment as well, so that we know what are some of the rules guiding us in the year ahead.

2017 have been a rather uncertain year, and it’s also my very first full investing year (since I started in March 2016). I would have to say that I truly learnt a lot from my friends over at IN and from reflecting upon all my investing decisions throughout 2017.

A Quick Reflection of 2017

2017 was an exciting yet frustrating investing year for me as I started 1st Quarter of the year by hitting a multibagger. And then things went rather slowly for me as the next few stocks that I picked took rather long before showing any forms of gains. Most of them were range bound, and prices hover around my purchase price.

Some lessons I learnt in 2017 includes:
1) Buy towards the end of the week to avoid being trapped by traders.

2) No matter how good a stock is, it is vulnerable to the macroeconomic conditions. There were several times where the global markets was on a downtrend due to macroeconomic instability (like North Korea shooting missiles into the water etc). Those times were the true tests of emotional discipline to stick to your investment plan as all the stocks that I am holding can start recording losses as big as 5 – 10% in a few days to weeks.

3) Always buy stocks with the abilities to catch the industry’s tailwind. In 2017, semiconductor stocks were very much in play and many stocks in this industry recorded at least 50% increase in share price. I guess what many investors’ meaning of “a rising tide lifts all boats” was pretty clear last year. Some semiconductor companies who have weaker fundamentals did not rise as much but still were able to clock in a decent share price appreciation due to positive industry sentiments.

Those were the 3 big lessons I take away from 2017 and sadly to say my own portfolio didn’t outperform that of the STI but I will definitely give it another shot this year!

Now looking on to 2018!!

Looking ahead!

I am looking forward to an even more exciting year ahead as I am rather big on three themes in 2018. Mainly the O&G, construction and property industry. By applying Lesson 3 that I learnt in 2017, I will be parking more funds to catch the positive industry sentiments by investing in good qualities stocks in those industries.

I shall share a little more on why I feel these 3 industries should outperformed the rest in 2018. For O&G, the industry was hardest hit in late 2015 as oil prices started crashing until it hit about US$20-30 per barrel which is too low for many O&G companies to make a decent profit. These caused the industry to consolidate as many smaller companies went bankrupt or were bought out (like Ezra, Ezion etc) This was because many companies took on huge loans to run the company when the prices of oil were very high  and when the oil prices crash they weren’t able to finance their debt as their main source of revenue is heavily affected. Now in 2018, oil prices have gradually been recovering and are now sitting near US$60 per barrel. As with all economic cycles, the period after consolidation is the time most O&G companies that were stronger will tend to survive and ride the next uptrend. (Survival of the fittest haha)

Thus I am looking at strong O&G companies with low debts to ride on the potential uptick in the O&G sector.

As for construction and property, its more for local play. Construction sector have been the weakest link in Singapore GDP as it continues to post negative growth in 2017. The construction sector is a labour intensive industry that have not been disrupted by technology. The government have been encouraging the use of technology in the sector to raise productivity in order to lower costs. However, it has not been working as the initial costs of taking up new technology is high and having more competition from foreign construction firms has led many local construction firms to not make the switch. However, the government intends to support the industry by bringing forward more construction activities. With major developments, like the T5 and MRT lines yet to be build this should inject some activity into the constructions sector this year.

Also, there have been a spate of enbloc activities carried out by property developers in Singapore. This should help to boost the construction activities in Singapore too as the acquired buildings will have to be demolished and rebuild.

With private home prices rebounding slightly in 2017, developers are rushing in to stock up their land banks in hope to be able to build new properties to catch the uptrend in private property prices. This represents an opportune time to invest in construction related stocks with support from both the public and private sector this year. Property developers that have many new private property launches this year may benefit from stronger demand due to a possible rebound in private property prices to cash in on their developments.

In conclusion,

these are the areas where I should be parking most of my funds in hoping that a rising tide can lift all boats. My search for undervalued companies in these industries continues and hopefully I will be able to catch some of them before they fly! 🙂

 

[Eye Candy]: What’s next for GSS Energy?

In the recent announcement by GSS, it have announced the long waited results of their oil and gas venture. I mentioned in my previous post on GSS that this catalyst is the most important for GSS in 2017 as it determines whether a not their O&G business arm will be successful. I also previously shared on IN that the most uncertain part of any O&G business is the exploration phase as a company can spend millions on setting up the place for drilling but if they can’t find substantial oil in the area, its a failed effort.

GSS logoAnd yes! They did it. The management’s postulation on the Trembul area seems to be right.

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In this post, I shall made a new set of possible postulations of what might happen from now on for GSS after reading the various articles and reports about GSS after they have found oil.

Summary of Announcement

According to the announcement released, there are 8 columns of hydrocarbon found under SGT-01, the well that they drilled. The first 2 being gas and the next 6 is oil.

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And according to in-house estimates, the 1P (proven) recoverable resources in SGT-01 is 2.83 million barrels of oil from the 6 oil zones and 8.49 BCF (billion cubic feet) of sweet gas (equivalent to 1.5 million standard cubic feet per day (MMSCFD) of sweet gas for the period of 14 years).

I believe that the management was very wise in choosing that location to conduct SGT-01 well exploration as it is near several other old abandoned wells which allow them to also be able to deduce the oil profile of those older wells. Because of this discovery, they were able to estimate more accurately, the oil profile in well P1 that was drilled by Pertamina back in 2005. (Well P1 have more than 3 potential oil pay zones).

Also, GSS have shelved asides plan to drill SGT-02 which was supposed to be done after SGT-01 to drill the surrounding wells near SGT-01 so that revenue can be recognised from this discovery. Another wise move.

GSS will look to monetise the sweet gas zones in SGT-01, start oil production for well P1, TRB03 and TRB06. (I am assuming right here that all these wells are chosen because they are of close proximity to SGT-01 which allow them to have a better understanding of the oil profile in those wells). All these works aim to yield 200 barrels of oil per day by 3Q18 and monetise the sweet gas in SGT-01 before the year ends.

What does all these mean?

All these will mean that GSS will finally recognise their maiden revenue from their oil and gas venture. I shall attempt to do a brief calculation of how big this is for GSS.

For SGT-01,

 

8.49 BCF of gas is equivalent to 8617350 MMBTU of gas. As of current natural gas price, 1MMBTU cost USD$2.65 (but let’s discount it to USD$2.50)

Total gas revenue = USD$21,543,375 = SGD$ 28,006,387.50

Share of revenue for GSS = 31.4% of total gas revenue then 89% of PT SGT = SGD$7,826,664.45

Can’t assume the net profit as we are unsure of the cost required to produce the natural gas. But one noteworthy fact is that the gas found is sweet which is of high quality and can be sold for a higher price.

For oil,

Total oil revenue = 2.83 million barrels of oil x USD$50 per barrel = USD$141.5 million = SGD$183.95 million

Share of revenue for GSS = 23.5% of oil revenue and then 89% of PT SGT = SGD$ 38.5 million.

Net profit for oil (assuming cost of production per barrel is USD$15) = $SGD 26.9 million

For SGT-01 alone, total revenue (oil and natural gas) they can get out of this = SGD$46.3 million

For Well P1,

There are more than 3 potential pay zones according to their announcement.

Screen Shot 2017-12-28 at 11.43.32 AM.png For simplicity sake, let’s just assume that in Well P1 there is only 3 oil pay zone, and that the oil profile is similar to SGT-01. Meaning for that 3 pay zones, it yields 1.41 million barrels of oil (2.83 barrels divided by 2).

Total oil revenue from P1 (assuming USD$ 50 per barrel) = USD$70.5 million = SGD$91.65 million

Share of revenue for GSS = 23.5% of total oil revenue and then 89% of PT SGT = SGD$18.76 million.

Net profit for GSS (assuming USD$15 per barrel COP) = SGD$13.41 million

For well TRB 03 and TRB 06,

Firstly we have to assume that TRB03 and TRB 06 are of close proximity to SGT-01 and they share rather similar oil profile. Because out of all the 24 abandoned oil wells that GSS could pick to work on, they have chosen these two, which I believe is after due consideration.

As we do not have much information on TRB03 and TRB06, we shall assume that both only had 2 oil pay zones. Total oil resources = 1.88 million barrels of oil

Total oil revenue from these 2 wells (assuming USD$50 per barrel) =  USD$94 million = SGD$ 122 million

Share of oil revenue for GSS = 23.5% of total oil revenue and then 89% of PT SGT = SGD$25.5 million

Net profit for GSS (assuming USD$15 COP) = SGD$13.7 million

 

TOTAL GSS REVENUE FROM ALL THESE 4 WELLS = SGD$ 90.56 million 

 

Assumptions Made,

  1. All wells have similar oil profiles as SGT-01, but to be conservative, I have assumed P1 only had 3 oil zones when there are more and also only assigning 2 oil zones each for TRB03 and TRB06 which should be much lesser than it could possibly be.
  2. I also assumed a lower oil price of USD$50 per barrel
  3. Cost of production is said to be USD$10 – $15 per barrel but I took the high end to calculate for all.
  4. Exchange rate used is USD/SGD = 1.3

 

What could go wrong?

Despite all the rosy picture about them striking oil, I would also like to analyse what can possibly go wrong. They may meet with some execution problem, where they are unable to successfully withdraw the oil or the gas.

SGT-01 is the very first exploration well that they drill. Supposedly, SGT-02 will be the next exploratory well and when they go there, the risk of not finding substantial amount of oil to commercialise will remain. The risk remains that when they drill in other areas of the Trembul operation area they might not find enough oil to commercialise it. So you can think of SGT-01 as the first battle won out of the many other battles that have yet to be fought.

Potential Catalysts

Their PE business have been doing rather well. The CEO have been talking about seeking to unlock value in the PE side of the business for sometime now. That could come in the form of a strategic divestment of partial ownership of the business or seeking a spin off of the PE side.

After all, the name GSS Energy is a clear indication that CEO Sydney wants to grow the oil business into a full fledge business to stand on its own. So I am looking forward to the oil business gaining some stability before CEO spins off the PE side of the business in 1-2 years time.

Of course, a clear catalyst for the oil business would be the discovery of more oil reserves in the area, which I think is very possible. If they continue with the strategy of digging exploratory wells near old abandoned wells, its very likely that oil can be found there.

In conclusion,

the total value of the 4 wells they are working on is worth SGD$90.56 million. At the price of $0.175 which is the price the CEO last bought from the open market, the market capitalisation is only SGD$ 86.8 million. Which is undervalued as they still have a functioning PE business delivering about SGD$75.61 million in revenue for FY 2016. Furthermore, this is only phase 1 of the oil business for GSS, they can still strike oil in other areas of Trembul with the 22 untapped abandoned old wells.

I would say that GSS is a long term play as the initial period of oil production is usually the hardest. Holding it for 2-3 years should see the real value being uncovered should everything goes according to plan.

PS I am vested.

Links where I took my information from:

http://infopub.sgx.com/FileOpen/SGX-GSSEL_20171213-Completion_of_well_SGT-01.ashx?App=Announcement&FileID=481906

https://www.nextinsight.net/story-archive-mainmenu-60/939-2017/11930-gss-energy-first-oil-discovery-with-sweet-gas-surprise

 

[Portfolio]: Added Emperor Capital

Emperor Capital is a financial institution in Hong Kong listed in the HKEX.

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Its professional teams provide a wide range of financial services including: brokerage services for securities, futures and options traded on the exchanges in Hong Kong, Japan, the US and the UK, as well as wealth management and asset management services; provision of margin and IPO financing as well as loans and advances such as personal money lending and second mortgage loans; placing and underwriting services; and corporate finance advisory services.

Financials

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Its financial growth have been impressive. CAGR for revenue is 23.37% and CAGR for its net profit grew at 33.41%.

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Cash in hand stands at HKD $2,368,604,000 compared to total borrowings of about HKD$1,900,000,000

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Insider Ownership

The CEO Ms Daisy Yeung is deemed interested in 41.31% of the company’s shares as she is the beneficiary of AY Trust set up by her father Dr Albert Yeung.

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Also interestingly, China Huarong International and Taiping Assets Management owns about 9% of the newly issued shares from Emperor Capital. Both are big state owned companies in China and this could pave the way into potential positive developments for Emperor Capital in the future.

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Possible Catalysts

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Surprisingly with the impressive revenue and net profit growth, Emperor’s share price is still range bound since September 2015. In my opinion, this is a rare gem that is forgotten by the market. Given its PE of 5x, there is definitely room for it to re-rate upwards. Also, with the management owning roughly half the entire company, its in their interest to push the price up. With the entry of well known companies like Huarong and Taiping taking a stake in the company, this should give Emperor Capital more visibility in investors’ radar.

At current price of HKD$0.570, it’s trading at its support level and could possibly represents a trend reversal at this stage.

[Portfolio]: Added Nordic Group

Hi all, recently I have started a portfolio where my friends and I will screen for opportunities and enter them together. We have decided to add Nordic Group into From Ground Zero’s Portfolio. Nordic Group have long been in my watchlist and we entered at the price of $0.530.

nordic-group-limitedNordic Group is a global systems integration solutions provider serving mainly the marine, offshore and oil & gas industries. Their business segments include 1) system integration, 2) maintenance, repair, overhaul and trading, 3) precision engineering, 4) scaffolding services 5) Insulation services. Most of their businesses are in the O&G sector but they also do serve the aerospace and medical industries.

Their revenue and net profit have been increasing for the past 5 years with little debt used.

nordic-financial-highlights
Furthermore, Nordic CEO have been owns a lion share in the company (55.38%) and also recently bought Nordic’s shares at $0.50.

Catalysts ahead

With oil prices heading upwards, we could see more O&G companies spending more on capital expenditure to upgrade their existing systems or even to build new ones. This should help Nordic gather more contracts from their O&G clients going forward.

Besides the possible positive industry tailwind, Nordic have about $96.9 million worth of order book as at 31 Sept 2017. This is a good record to have especially operating in a tough industry.

Also, their new acquisition Ensure Engineering have been doing very well for Nordic. The Group’s Maintenance Services business segment jumped by 83% from S$5.7 million in 3Q2016 to S$10.4 million in 3Q2017 mainly attributed to revenue contribution from Ensure.

In conclusion,

I would have to say that the management have been very shrewd and made many good decision for the company. All their acquisitions have been turning in good results for the company’s top line. Looking forward, the management have hinted at more acquisitions to diversify away from the O&G sector and to grow their maintenance services. By doing so, their revenue can be more recurring in nature compared to the main bulk coming from project services now. This is a positive development which should see the company growing even more in the next 1-2 year.

With the CEO’s putting his money where his mouth is, and being able to achieve such impressive record even in a downturn in the industry, I believe the future is bright for this company. We are LONG on Nordic Group.