[Eye Candy]: An in depth look into GSS Energy

Hello all! Today I will be doing a deeper analysis of GSS Energy. I am personally vested in this company hence, I would advise readers to exercise their own discretion when reading this post. Recently, GSS’s stock price have been going on a rollercoaster ride and many people including myself were thinking of cutting loss. But I held on because the prospects of the company are bright and the business fundamentals are sound. In the coming paragraphs I will bring you through GSS’s business and the outlook.

GSS logo

GSS Energy mainly operates in two business segments. 1) The precision engineering business and 2) the Oil and Gas segment. To let you understand a fuller picture I did a timeline of GSS transformation from 2013.

GSS timeline 1.png

GSS timeline 2.png

If you realised I never really talked about their PE business in the timeline above because during the period of 2013 to 2017, GSS took a huge plunge by venturing into the O&G sector which caused the main bulk of the movement in share prices. But since you got a fuller picture of what happened within this critical time span for the company, I will now analyse the respective business segments and their prospects.

1) Precision Engineering

GSS’s core business has always been precision engineering. In fact, they were a pure play PE firm before the new management decided to bring them into the O&G sector. Many people don’t realise that GSS Energy have a functional and profitable PE business. Come on the company’s name itself is misleading enough haha! So let’s take a look at how the PE business have done so far since 2014.

PE business.png

Both revenue and gross profit have been growing. That’s a good sign. Also, in 2017 they are shifting to a larger facility in China which will allow them to accept larger and more sophisticated orders as they capitalise on the chance to improve the new facility.

And for 1Q 2017, their PE business continued to grow at about 28% Q over Q.

1Q2017

That is kinda impressive. With so many competitors in the PE industry, it is sometimes hard to grow one’s business. However GSS PE business have been able to consistently grow their PE’s business revenue and gross profit for the past 3 years. This shows that the management are able to position the company’s services such that it attracts larger sales order from existing customers or obtain new customers to the company and at the same time reduce cost of production.

The thriving semiconductor industry in 2017 have become a favourable tailwind to GSS’s PE business. With a strong record of building up the PE business, and demand for electronics set to grow this year, this could be a record year for the PE business for GSS. In fact, the CEO have also considered plans to further grow the PE business through strategic acquisitions or collaboration, spinning off the PE business have also been considered by the CEO. That shows the confidence he have in the PE business.

2) Oil and Gas exploration

I think this is the main segment that is important to many investors. Since this business is new to GSS and there have been a case of their failure in this new business segment. The CEO’s concept in the O&G is not ordinary. He wants to ensure that there are certainty of oil in the ground and that it must be low cost so that they will not be badly affected by changing oil prices.

CEO Sydney’s way to achieve those objectives was to acquire old abandoned wells in Indonesia and drill them. The rationale for that is simple. Back in the old days, the colonialists have created many oil wells for their own needs. But in WW2, the colonialists destroy these oil wells so that the Japanese could not get access to these resources. So by acquiring these old oil wells, the cost of production of drilling for oil in that area becomes low. (About US $12 per barrel estimated)

Of course, not every old oil well contains oil reserves. Extensive studies have been done by GSS before committing to any sites. The current one that they are working on the Trembul Operation Area is in the same basin as the one Exxon Mobil use to draw oil, so certainty of obtaining oil seems to be quite high. And if the Trembul Operation is a success, the CEO have in mind to expand around the area in order to grow their O&G business to be a full fledge player in the industry.

Also, the type of agreement that GSS signed with PT Pertamina, Indonesia national oil company is different from the one they signed in the 2014 debacle. For this arrangement, money earned in the sale of oil is first used to pay off the cost of production of the oil before profit sharing is done. And since, the oil is bought by the government there are some forms of certainty in the buyer.

Risks

Yup the risks of not obtaining oil, execution risk and low oil prices are definitely there. But in my opinion, these scheme of arrangement with Pertamina puts GSS in a better position to reap profits from the venture. Unless oil price falls below US$20 per barrel which is rather unlikely, this remains profitable for GSS. Also, as a show of confidence, CEO have been buying shares in Jan 2017.

 3) Fundamentals

Balance sheet

GSS balance sheet looks fine. I am more concern about debt since O&G companies around the world have been going bust because of debt issues.

balance sheet.png

Debt free company! And the group have a rather strong cash reserves of about $11 million.

Cash Flow

gss cash flow.png

Cash flow is improving. Free cash flow have been rising ever since 2014. That is definitely a good sign. Haha credits to Investingnote for doing the calculations! 🙂

Insider ownership

The CEO holds 17.99% stake in the company and a non-independent, non-executive director Glenn Fung holds a 13.44% stake in the company.

stakeholders.png

That’s a combine 31.43% stake in the company from 2 members of the board in GSS. The management definitely have their interests aligned with the shareholders. Furthermore, the CEO have been buying up shares in 2017 as well.

4) Outlook

I feel GSS have more legs to run. Backed by a profitable PE business and with the oil business coming online in 2017, this could be a good year to watch for GSS. I think some of us are concern because FY 2016’s results are backed mainly by a once off income gain by the government.

once off income.png

If you realise without the once off income, they would only have about $3 million in profit for FY 2016. That translate to about PE 28x at current price. To see if the current price is considered undervalued after factoring some future catalysts, I shall try to do a conservative estimation based off some assumptions.

  1. No growth in PE business
  2. Company manage to retrieve oil from the ground
  3. Price of oil remains in USD$40 to USD$50 per barrel

Assuming there is no growth in the PE business, we are looking at a revenue of $70 million and an EPS of SGD 0.6 cents.

Now according to a QPR by GSS, there is said to be 24 million stock tank barrel of oil reserves in the Trembul area up to 800m deep. GSS subsidiary PT SGT a 49:51 JV is entitled to about 23% of the oil reserves there. So GSS is entitled to 49% of the 23% of total oil there are.

gss QPR trembul.png

GSS’s contract with Pertamina is for 15 years, that would entitle GSS to have

49% of the 23% of 24 million barrel of oil = 2.70 million barrel of oil

Assuming a more conservative figure — GSS are entitled to only 2.16 million barrel of oil

So 1 year = 144 000 barrels of oil

Assuming GSS cost price per barrel is USD $20 (actual estimated is USD $12) and price of oil ranges from USD$40-50 (Let’s take USD $40 to calculate)

Net profit for GSS oil business per year = USD 2.88 million = SGD 3.75 million (USD/SGD of 1.3) = EPS of SGD 0.755 cents

Total EPS when O&G comes online = 0.755 + 0.6 = 1.355 cents

Which translate to a PE ratio of 13 at share price of $0.175 (the price which CEO last bought his shares from the open market). This is could be why CEO’s Sydney emphasize that GSS is undervalued.

The above is taking into consideration that there is no growth in the PE business and that oil prices ranges from USD$40 to USD$50 per barrel.

In conclusion,

one should monitor FY2017 closely to see the rate of change of pure earnings Q over Q. Supported by positive tailwinds from the semiconductor boom and with oil prices stabilising out, it is definitely a growth company at an inflection point. FY 2017 result may not be higher than FY2016 but one should always look at the real growth rate of earnings to determine if there is growth potential in the company. With that, I shall end my analysis, rmb to DYODD!

[Eye Candy]: An update on Addvalue Tech

Hi all, I have decided to do an update on Addvalue Tech since a lot had happened since my last post on Addvalue. For those who may not know what I am referring to. You can check out my 2 posts on Addvalue below.

1. Addvalue Tech, a turnaround play? 

2. Addvalue Tech’s 3Q results 

1) What happened?

— New Investors —

A few things happened since my last post. Addvalue declared 2 trading halts in a span of a few weeks.

Addvalue news.png

Firstly, news were released about AT raising money to prepare for the commercialisation of the IDRS. If you are thinking that raising money = debt = even more financial trouble at AT, then these news will be slightly different. Money were raised in 3 forms, one is through the issue of new ordinary shares, convertible loan notes and lastly an exchangeable bond worth $2 million.

Why I would say this will be slightly different is because majority of those who gave their money to AT are affluent investors. They include investment firms and some accredited investors. The placement shares were priced $0.039 per share.

placement subscribers

As for the convertible loan note, its a 5% per annum with a choice to convert it into shares of the company at $0.055.

loan note subcriber.png

Once again, most of the subscribers of the placement shares are also subscribers of the loan note.

Also a venture investment firm known to be Cap Vista, the investment arm of DSTA invested $2 million in the form of exchangeable bonds for 5 years. It is a 5% per annum payable in full on maturity, however in the event that AT spin off Addvalue Solutions (AVS) a subsidiary of AT, these shall be exchange for shares in the company. FYI, AVS is the arm in AT that is focusing on the development of the IDRS, hence the investment.

These shows that there is a form of quiet optimism that AT’s IDRS will succeed. That’s the reason for the slight difference.

— Uptick in sales —

AT uptick in sales

It’s current product the Wideye iFleetONE terminal have earned an initial trial order of about US$1.0 million. It is also in discussion with potential customers for an additional order of about US$3.5 million.

3q2017

I am not sure if the initial trial order amount of 1m is going to be recorded in Q4. But let’s assume it is. This would mean a revenue of more than US$10 million for FY 2017, as Q4 usually records 2-3 million in revenue. That would be much higher than the 9 million revenue recorded in 2016. Using a bold estimate, we could see AT returning to the black, as AT have been trying to cut cost in recent Qs. Currently, 9M2017 is a loss of US$1.2 million. Of course the above is my personal estimation, we shall see if its true in the coming FY announcement.

2) Risk remain

The recent spate of events have ticked some of the catalysts that I have laid out in my first post on AT. However, risk like their cash flow still remain in this business.

— Cash Flow —

Having sales is of no use if the company cannot bring in cold hard cash to finance the company’s operations. As for now, it could be a race against time to see if they can fully commercialise the IDRS before their money eventually run out. I am still hoping that they could finally reach a deal to sell away AVC one of their subsidiary in order to spice up their balance sheet. I will be watching its cash flow closely in the coming earnings report.

In conclusion,

AT new chart.png

The recent events have caused the stock to run up from $0.044 to $0.062. I have a tiny portion at $0.04 just 0.1 cent higher than the placement share. For now, I am holding out since I am already in the money. I am looking to add to my position when the stock consolidate or after the upcoming earnings results. Personally, I feel quite confident of the IDRS project, now the ball is in AT’s court to translate what they have into an earnings generating monster!

 

 

 

 

 

[Eye Candy]: Tiong Seng, a sleeping giant?

Recently, I have been trying to look at sectors that have been through a rough patch to see if I can find any hidden gems within this depressed sectors. One sector that pops up is the construction industry. Property prices have been stuck on the ground for some time now. As property developers grapple with the cooling measures imposed by the government, this means lesser construction demand by property developers which affects the construction industry as a whole. I feel it is in times like this we are able to look for promising companies that are strong enough to weather this storm and thrive when the sectors eventually recovers. One such company that came across is Tiong Seng Holdings Ltd.

tiong-seng-1

A little bit about Tiong Seng. Tiong Seng is a homegrown construction and civil engineering company with  58 years of track record. JTC@Tuas, Mediapolis@One North the new home of MediaCorp, SIM Campus were just some of the projects that Tiong Seng have undertaken. They are also into property development in China, mainly with projects in the second and third-tier cities like Suzhou and Yangzhou.

1) Fundamentals

– Debt level –

Tiong Seng’s debt is a bit on the high side. It have a 92m dollars cash & cash equivalent but debt of about 175m dollars (ST+ LT).

TS BS1.png

TSBS2.png

That’s about 2 times its cash & cash equivalents. As the construction industry is a very competitive industry that require high upfront costs, I wanted to see if this figures are considered over-leverage. Hence, I decided to do a comparison across some of the big construction companies listed in the SGX. I chose 4 companies with comparable market cap to Tiong Seng and did a comparison of their debt levels.

TS compare debt

Hence, in my opinion, Tiong Seng debts/CCE of about 2 times seem to be acceptable for a construction company.

– Cash Flow –

Managing cash flow in a construction company is rather challenging. There’s always a risk when any business take on a huge capital to finance a project. Furthermore, earnings in the construction industry are usually lumpy in nature as they receive their earnings in phases. This could lead them into a huge debt spiral if they borrow huge amounts and are unable to repay them in time due to unsuccessful project tenders, costs overrun etc.

TS Cash Flow.png

It has recorded positive cash flow from operations for 4 out of 5 years. Net change in cash is positive for 2 out of 5 years. It’s cash flow is still considered decent in my opinion.

– Management –

Tiong Seng was founded by the current CEO’s father, Pek Ah Tuan. Peck Tiong Choon which is a company founded by the current CEO’s father and his brothers. Peck Tiong Choon have a 59.8% stake in Tiong Seng. One of the non-executive director, Lee It Hoe also deemed to have about a 63.1% stake in the company.

Ownership2.png

What I think it means is that members in the board like Mr Lee It Hoe have Tiong Seng’s shares through Tiong Seng Shareholdings. Furthermore, the current CEO being the son of Mr Pek Ah Tuan should have a vested interest to advance the business started out by his father. Of course, that is hard to say. Family business can be prone to infighting and can fail as well. But I have to say I have been rather happy with the management’s decisions so far. I will share with you why below.

2) Prospects

– Technology focused –

The adoption of technology in the construction industry have been a long drawn process. In an environment where competition to offer the best tender is strong, it is hard to see these companies adopting technology to aid productivity. However, Tiong Seng have a different approach in this. For instance, Tiong Seng invested in the very first Precast Automation Hub in Singapore where they have experienced a significant 70.0% reduction in manpower while raising output and maintaining consistency. They also use computer software programs to ensure that their buildings are well designed before starting actual construction reducing wastage. Tiong Seng also employ the use of PPVC and PBC where a portion of the building are fabricated off-site. Building Construction Authority (BCA) have also been encouraging the use of such approach.

TS tech

TS tech 1

In my opinion, Tiong Seng’s innovation to the construction industry will put it in good stead to provide not just quality but also efficiency. Being one of the few construction firms in Singapore to focus so heavily on technology, I think this factor should play out well in favour of Tiong Seng in the future.

– Construction industry to be boosted by public sector demand in 2017 –

Given the current property outlook, private demand for construction remains soft. However, the government have announced more public construction work in 2017, valued to be around $24 billion. Tiong Seng have the highest A1 grade from BCA for both civil engineering and general building which allows it to undertake public sector projects with unlimited value. To illustrate how prestigious that is, take a look below.

BCA A1.png

BCA grades the construction sector in two categories, General Building and Civil Engineering. To be able to obtain A1 for both categories is certainly not an easy feat. Most companies only have 1. Hence, with public sector demand rising, Tiong Seng should be in a nice position to grab a share of the pie given its strong track record. Besides, it is becoming a common practice for the government to award contracts to companies that may not be the lowest bidder in tender exercises.

 

3) Risks

– China Property Bubble –

Property prices in China have been running sky high. In the short term, that could definitely be a boost to Tiong Seng’s revenue. However, like every bubble, there will be a correction coming. China’s government have put in place many cooling measures like tighter loan restrictions to simmer down the property market.

china house price

As we can see a top has formed, and a correction will definitely not be good for Tiong Seng’s property developments business in China. Revenue will definitely be affected. However, in my opinion, the main issue with China property prices, is speculation. Prices can raced up about 23% in a year.

An article in Business Insider also explains that the Chinese government is looking for healthy developments of the real estate market.

business insider.png

Hence, I believe that although Tiong Seng’s China venture will be impacted when the property bubble burst. Their strategy to only develops in 2nd and 3rd tier cities will help them in the long run as China embraces the OBOR initiatives to connect more of their cities together through building infrastructure. Furthermore, by developing in the 2nd and 3rd tier cities, it can translate to lower costs compared to a 1st tier city. We shall see how their China venture pans out, hopefully they have learn their lesson from their overseas venture debacle in 2014.

– Execution risk –

And like all construction companies, execution risks remain the most probable. Having to deal with rising labour costs, material costs, safety etc etc. It is important that a construction companies do not run into a Stop Work Order, which will be no good to the company. However, given Tiong Seng’s track record, that risk should be relatively smaller compared to other construction firms.

 

In conclusion,

Tiong Seng’s PE stands at 7.7 as of today with a price of $0.260 per share. Tiong Seng’s PE don’t really tell much as most construction firms are undervalued at the moment. Also, the construction industry being a lumpy in nature, we may experienced very wild fluctuations in their earnings and hence their PE ratio. A better indicator would be their Net Asset Value (NAV), it stands at $0.594 with $0.164 cash in hand per share.

Tiong Seng chart.png

Also, based on the chart, it has been consolidating at a rather low price for some time now, which provides a favourable entry point. If Tiong Seng can achieve more contracts in 2017, there will be a strong reason to believe an upward break out in price can be achieved. Currently, I am not vested yet as I am still observing the price movement of the stock. Do always remember to DYODD! Cheers! 🙂

[Eye Candy]: Addvalue Tech’s 3Q results

It’s been some time since Addvalue Tech (AT) have announced their 3Q 2017 results. I thought its about right to do an analysis on AT’s 3Q results to see if they are on track for a turnaround as mentioned in my thesis.

Income Statement

3Q2017.png

Revenue was down in 3Q17, however 9M17 showed a 66.6% increase in revenue helped by the increase in revenue registered in 1H2017. I tried searching up 3Q results for the past 2 FYs which did not show any relations with 3Q being their weaker Q of their FY. Hence, I do not believe that their weaker showing in 3Q is due to seasonality factor. From the looks of it, AT is still not recording enough sales of their products and the effects of some of its catalysts have not kicked in yet.

The management has promised in several of their earnings statements that they are focusing on cutting costs which can be seen in the recent Q. In the blue box, it shows that the management is committed to what they said with regards to cutting down on expenses.

Net profit for the 3Q period was a loss of about 1m, while 9M17 is better compared to 9M16 despite still being in a loss.

 

 

Balance Sheet

3Q17 Assets.png

Not much has improved in their assets, cash and cash equivalents drop by about 50% which shows that AT’s business continues to burn cash. Trade receivables and inventories are lower as well which could be an indication that subsequent 4Q’s results may not be good as well.

AT3Qliabilites.png

We can see a substantial reduction of their debt as of 31 Dec 2017. As announced by the company, they used the money raised from the rights issue to pay off their debt.

Overall, balance sheet has not improved much since my previous analysis. Fundamentally, the company is not doing well.

 

Cash Flow Statement

3qcashfrmops

The business continue to register negative cash flow from operations, which means that cash is not coming into the company from the product they sell. Even after accounting for depreciation and amortization, AT still recorded a loss. This shows the inherent business is not doing well. Sales of their products cannot overcome the costs involved.

3Qcashfrminv&fin.pngFrom the cash flow from financing activities, we can see that AT took a 512k loan, which was reflected in the balance sheet above. 9M 2017’s liabilities reflected a 523k in borrowings, which showed that the bulk of the money was borrowed in 3Q17. Furthermore with borrowings > cash & cash equivalents, it reinforces the notion that money continues to be borrowed to finance the company’s operations. This could be a slippery slope, if AT do not record enough cash flow from operations in time to come, as more borrowings will be required to sustain the company. If this gloomy prediction is true, we could see it’s debts balloon up again and calling for another rights issue could be imminent.

Overall, their cash flow remains a huge concern for them.

 

SWOT Analysis

Strengths

The company’s strength still lies in them being an industry leader in satellite communications terminal. Their R&D ability is strong given the example of the IDRS. Their partnerships with various big satellite players like Inmarsat and Thuraya is one advantage to their business.

Weakness

The company’s financial health remain to be a headache for investors. Weak balance sheet, escalating borrowings, coupled with poor cash flow will pull down the company if things do not start to change.

Opportunities

As I mentioned in my previous post on AT, the company have many potential catalysts in place. Their stronger foothold in China through the One Belt, One Road initiative, the development of the new IDRS product which will clock them airtime revenue and the possible disposal of their subsidiary AVC. I wouldn’t put my money on the disposal as it has been delayed for 3 years now. What I see potential in is the venture into China’s market and the new IDRS product. China’s One Belt One Road initiative would see construction of massive infrastructure around the globe and some of these places like deserts have poor communication networks. This is where AT could play a pivotal role in providing their products. Given the massive scale of the project, I believe the venture into China would be a massive lift in their revenue in time to come. The new IDRS product being the first in the world which allows operators of LEO satellites to constantly keep in contact with their satellites can give them an early advantage into the market. In some of their announcements, it was mentioned that airtime revenues will be given to AT which will provide recurring revenue in time to come.

Threats

While all the potential catalysts paint a rosy picture on the company’s outlook, the inherent weak financial health will constantly threaten the company. Many of their catalysts have not been in effect yet as shown by their dismal 3Q showing. But the main problem will be if they are able to capitalise on them. AT have all along been a strong R&D company, however, their inconsistent earnings showed that they have not been able to fully capitalise on their innovations. Weak revenue figures only emphasise that although AT’s products are amazing, it has not been able to either market it well or it has not address the customers’ needs.

In conclusion,

if anyone were to enter a position into AT now, it would be a punt for good developments within the company or a deliberate play by BBs as the company stock prices are around the lowest ever it has recorded. For long term investors, it would be good to enter into AT after some of their catalysts have come into place which should give them a stronger earnings record. Personally, I love company that have new cutting edge products as this would mean market monopoly and strong earnings but for AT we will still need to observe closely before taking any concrete actions. This should be my last post for a while, as I am going to Thailand for a military exercise. Won’t be posting for some time. Till then, good bye! 🙂

 

[Eye Candy]: Nordic Group riding on O&G recovery?

Nordic Group have long been in my eye candy list for some time now. Not only does it have a good fundamentals, it has been able to withstand the chaos in the O&G sector while posing earnings growth during this period of time. A company that can withstand headwinds in the industry are certainly poised to do well when the sector recovers.

nordic-group-limited

Nordic 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. (But to a small portion)

Fundamentals

1) Strong earnings record

As I mentioned earlier, Nordic have managed to grow their earnings rather significantly over the past few years. Even when many O&G companies (their customers) are cutting budget and hence spending, this company have punched above its weight. Here’s a snapshot of its financial highlights.

nordic financial highlights.png

Various indicators of earnings are all pointing upwards, which shows the strong earnings momentum the company has. Also 2016 being the year where O&G sector faced many unpredictable headwinds, like falling oil prices. Nordic have still managed to grow its revenue.

nordic-q4-result

Despite challenges, revenue for FY 2016 increase 2%, profit net of tax increased 21%. If Nordic can weather the storm in the industry, it should present a good growth opportunity when eventually the industry recovers and O&G companies start to spend again.

2) Strong balance sheet and cash flow

Current ratio of 1.74, with cash and cash equivalents covering its debts. Nordic have also been registering positive cash flow from operations for the past few years.

Fundamentals.png

3) Insider ownership

nordic-insider

All 3 executive directors of the company are part of the 20 largest shareholders in their own company. Furthermore, company have been doing regular share buybacks. Latest one being at $0.24 a share.

Catalysts

Going forward there are a few catalysts that could propel the stock further.

1) More contract wins and possible acquisitions

With oil prices stabilising around $50 per barrel, compared to the atrocious $30 per barrel at the start of 2016. A recovering 0&G sector can be beneficial for Nordic as more of their customers start spending more to upgrade or improve their facilities. This should lead to more contract wins for Nordic given the strong reputation it has in the industry. With Nordic low debt, they could also possibly look to acquire companies in similar industry to boost their source of revenue, just like the acquisition of Austin Energy in 2015.

2) Going into pharmaceutical industry

In the AR of 2015, the Chairman also mentioned going into the pharmaceutical industry. This should open up new form of revenue stream and allow Nordic to grow their business out of the O&G sector.

austin-energy

Technical

Based on the chart, this gem have already been discovered by many investors.

Nordic chart.png

Clear and nice uptrend. Currently, Nordic have reach upper channel line and I am hoping the pull back will hit the support at $0.270. This will present a rather lucrative price to enter given the upside potential.

In conclusion,

this is a rather straight forward company to analyse. Strong fundamentals and possible tailwinds to promote growth should the O&G sector improves. $0.270 will be a great price to enter!

 

[Eye Candy]: Addvalue Tech, a turnaround play?

Greetings, pardon my corny title above. Haha! Recently, I have been browsing through some companies that could provide great investment opportunities in the near future. My rationale for doing this is so I can put all them on a watchlist and enter them when the time is right. Haha I decided to name this segment “Eye Candy” to remind myself that for now I can only look at it and not take any actions. Haha! Also, I don’t intend to share this on Facebook, as this is purely for me to understand my own line of thinking and for those who chanced upon it on my blog. Alright, let’s dive straight into this company that I found rather interesting. Addvalue Technologies.

Image result for addvalue technologies ltd

Before we go into the nitty-gritty of the company. Let me give you a brief summary of what the company does. For simplicity sake, I will call the company AT in the remaining part of the thesis. AT is a company that provides satellite based communication terminals and solutions for a wide range of  voice and Internet protocol (IP) based data applications. To put it simply, their business revolves around getting you connected to the communication network (internet data, voice calling etc) in places that communication network are not available. For instance, ships out at sea do not really have a fix communication network they could tap on. AT creates a dongle-liked thing which allows you to serve your internet and make phone calls out at sea. They IPO in 2001 when they were in the consumer telecommunication business. Due to strong competition, they sought new growth area and ventured into their current business in 2006.

What I like about this company is their spirit of innovation to venture into a new business when things aren’t doing well. Of course, spirit or not doesn’t matter if their results do not show. Let us then take a look at the fundamentals of the company.

Fundamentals 

To get a holistic view of the company, let’s take a look at the financial report for the past 4 years.

Financials.png

Sorry for the bad alignment!! Haha my first time trying this. As we can see that the company earnings have not been consistent. There has only been 1 profitable year which is in 2014. So I was curious what has caused the company to record losses in FY 2015 and FY2016 when FY 2014 was in the black.

FY 2015

FY2015 problems.png
From AT Annual Report

Profitability was hampered by once off kick ups like buying more expensive materials and R&D efforts.

FY 2016

FY 2016 problems.png

As we can see FY 2016 was impacted by 2 delays which are both related to their working partners. AT ‘s business depends a lot on satellite telecommunications companies like Inmarsat and Thuraya which AT have long partnership with. AT creates the satellite terminals and use their satellite systems to provide connections to consumers who buy their products. Also it’s expansion into China have also been met with some problems cause by economic headwinds.

Balance Sheet wise, AT do not fare well too. It’s borrowings are high. Current ratio do not look good. Very little cash on hand.

Liabilities 2016.png
FY 2016 Annual Report

Hmm not a very good sign…

Cash flow from operating activities have also been in the negative for the past 4 FY except FY2014. Fundamentally this is a company that I would avoid at all cost. But after examining the potential catalysts and the earnings for the 2Q in 2017, I feel that the company could be at its inflection point.

These are some potential catalysts for this company.

1) Earnings growth for first 2 Quarters of 2017

1q17

A 136% increase in gross profit in 1Q 17. (I think there was a typo in the report, but the values on the left usually represents the latest Q)

1h17

A 141.6% increase in gross profit in 2Q17. For the HY, a 139% increase. Comparing 1Q17 to 2Q17, the gross profit also grew 14.5%. That shows an increase rate in earnings as well. That is an encouraging sign.

2) Stronger foothold in China

China MOU.png

This MOU is announced in 26 Oct 2015. AT is required to design and supply products for the “One Belt, One Road” project. AT also entered into a strategic alliance with Zhong You Century a govt linked company in China.

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The deal came in after FY 2016 which will benefit FY 17. If you have read about China’s ambitious “One Belt, One Road” initiatives, you will realise that these deals will keep coming given the vast scale of the project itself. Also, if AT have anchor their working relationship in China, future projects in China will more or less be awarded to them. This will provide a form of stable revenue less likely to be impacted by economic headwinds given the strategic importance the One Belt One Road initiative is to China.

3) New product pending commercialisation

AT who have been engaging in R&D and constantly coming out with new products could see their latest product being a game changer. The new product named the Inter Satellite Data Relay Terminal (IDRS). Basically, this product will address long standing issue of communication with Low Earth Orbit Satellite (LEO). Normally a LEO satellite is used to collect data on several information about Earth ranging from climate to land information. Currently, sending data from LEO requires its orbit to meet with the location of where the observer is. In lament terms, there are only certain window of opportunities whereby information from LEO can be sent to the observer. With this new product, AT have circumvented the problem and their new product allows the LEO satellite to be able to communicate with the observer 24/7. This is a first in the industry, and will definitely provide a new form of revenue to AT.

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Just recently, AT announced a MOU signed with Inmarsat to commercialise the IDRS. This will be an exciting development to watch. Whether or not, it will contribute to FY17 revenue will really depends on the rate of commercialising this new product. Just like any first of its kind product, this will give AT an early mover advantage into this market.  Furthermore, if this is patented (I’m not sure if the AT is intending to) it strengthens their market share in the market.

4) Disposal of Addvalue Communications Pte Ltd

The planned disposal of AVC was announced in 2014, but the deal has since been delayed till today. The disposal price is a cash offer of $308 million dollars. If successful, this should help improve AT’s balance sheet and give it enough cash to further expand their operations.

5) Restructuring efforts

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AT is trying to restructure their business model to include avenues for recurring income from airtime etc. This should provide some stability to earnings in the future. rebrandin.png

They will be focusing more on emerging markets like China.

In conclusion,

I feel AT is company that is daring in their approach and not afraid to fail. Being the one of the few listed company in Singapore to venture into the space and satellite industry in 2006 is certainly a bold move. On many occasions, the management have also shown that the company is capable of innovating new products. Although for many years their earnings and balance sheet have not been outstanding, the current list of catalysts should benefit AT favourably in the near future.

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AT is currently trading at $0.037, which is around the lowest it ever recorded in its entire listing history. (Lowest was about 0.027). Of course, that doesn’t mean that the stock cannot continue to go down and eventually hit 0. However, given the limited downside risk and the upside potential. This could be a favourable entry point. However, I would still prefer to wait for the upcoming earnings report for more earnings stability before taking any decision. If I am going into this one. It should be a long position. Ultimately, the appreciation of the company stock price on the stock market is more often marked by the increase in earnings. Will Addvalue Tech eventually turnaround their company? Only time will tell.

That’s it from me. This is probably my longest post ever haha! Ohh rmb to dyodd and this post does not in any way promote you to buy this stock. It’s just my own humble analysis. 🙂