GSS Energy - RHB Invest 2018-03-27: A Visit To GSS Energy Batam

GSS ENERGY LIMITED 41F.SI

GSS Energy - A Visit To GSS Batam

We visited GSS Energy’s Batam factory and came away quite positive on the company’s outlook.
We understand that it is currently operating at > 80% utilisation and has earmarked another bigger site to shift to in 2019. This is to cope with additional orders (+10-20% y-o-y) from existing and new customers. In addition, we also expect it to produce and sell oil by 1H18, it is likely to benefit from the rising trend in oil prices.
We think that the current weakness represents a good opportunity to accumulate at lower levels. Maintain BUY with a SOP-based SGD0.25 Target Price (47% upside).

GSS Energy was formally set up by the Japanese, and hence its focus and expertise lie in high precision engineering (PE) capabilities, accompanied with high quality standards. This has enabled the company to secure several blue chip names like Phillip, Panasonic as well as being the only listed SGX manufacturer to have Lego as a customer, whom we know to have very high standards.
A majority of their machines are also from European and Japanese brand names.

Management revealed that the demand from its existing customers like Phillips and Lego has stayed strong, with orders growing 10-20% y-o-y.
GSS Energy has also been engaged in ongoing testing with a new customer in the consumer space, and expects to start full-scale production by 1H18 (this could boost the PE division’s topline additionally by 15-20% in FY18F).

We understand that GSS Energy has its own engineering, team which focuses on automating some of the labour intensive processes. This would be done by designing and customising some of the machines to better suit its needs, including writing its own software. That has driven down the total number of workers despite revenue increasing y-o-y.

On 13 Dec 2017, GSS Energy made a hydrocarbon discovery in its Trembul operating area. Management has stated that it expects production of gas to commence in 4Q18.
The company is re-entering a makeover well and we expect it to start producing 100-200 bbls of oil a day by 1H18 – and to enjoy better margins and profitability if oil prices continue to increase (an ongoing trend for the past few weeks). Brent crude oil has since hit USD70/bbl compared to the USD60/bbl we use in our forecasts.

With a positive outlook ahead affirmed by its recently implemented dividend policy, we think GSS Energy is currently at an inflection point. At its current share price level, the stock is significantly undervalued.
It also provides a unique opportunity for investors to ride on the manufacturing boom and the oil price recovery. We think that the current weakness represents a good opportunity to accumulate at lower levels.
Maintain BUY with a SOP-based SGD0.25 Target Price (47% upside).

Jarick Seet RHB Invest | Lee Cai Ling RHB Invest | http://www.rhbinvest.com.sg/ 2018-03-27

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.250 Same 0.250