SINGAPORE (Mar 6): RHB is initiating coverage on GSS Energy at “buy” with a target price of 25 cents, saying the stock is significantly undervalued and an ideal proxy to the tech and oil & gas sectors.
In a Tuesday report, lead analyst Jarick Seet says GSS provides a unique opportunity for investors to ride the manufacturing boom and oil price recovery given how the group recently affirmed its first oil & gas (O&G) discovery in Dec 2017.
“Management has stated that it expects production of gas in 4Q18. GSS is re-entering a makeover well and we expect it to start producing 200 barrels of oil a day by 1H18 – and to enjoy better margins and profitability if the oil price continue to rise,” elaborates Seet.
At its current price of 16 cents, the stock is trading at 9 times FY18 ex-cash earnings with valuations just accounting for the precision engineering (PE) business.
Looking ahead, the analyst believes the PE segment will continue its strong growth momentum on new projects further into FY18.
“There have been ongoing trials with a new customer in the consumer space, and GSS expects to start full scale production by 1H18 (which can contribute 15% topline growth for the segment in FY18). However, we understand that this project’s margins will be lower. All in all, we expect the outlook to still be positive for its PE arm in FY18,” he comments.
With the group’s O&G business likely to start producing revenue in 2H18 on top of its already profitable PE business and net cash balance sheet, Seet further expects the company to start distributing dividends representing 20% of PATMI in FY18.
This would result in a potential dividend yield of 2% for the current fiscal year, and gradually increasing to 2.5% in 2019, says the analyst.
On the group’s current position as the main contracted party to assist state-owned PT Pertamina in the production of petroleum in the Trembul Operation Area, Seet highlights that payment is made to Pertamina directly – not through a middle party like before – which hence reduces the risk of payment defaults.
“There is also a cost recovery scheme in place that allows GSS to recover opex and capex incurred through 80% of sales. This is a huge positive as it can then replenish cash flow, allowing it to drill more wells to increase production capacity at a faster pace,” he adds.
As at 10.24am, shares in GSS Energy are trading at 16 cents or 1.6 times FY18 book.
