GSS Energy - RHB Invest 2018-05-17: Awaiting Results Of Drilling Findings

GSS Energy - RHB Invest 2018-05-17: Awaiting Results Of Drilling Findings GSS ENERGY LIMITED SGX: 41F

GSS Energy - Awaiting Results Of Drilling Findings

  • Maintain BUY with unchanged SOP-based Target Price of SGD0.25, offering 63% upside.
  • GSS Energy reported a weak 1Q18, due to an increase in administrative and selling & distribution expenses, on higher drilling activities in 1Q18. Its precision engineering (PE) segment continued to deliver strong PATMI growth of 21.1% y-o-y.
  • We expect 2H18 to pick-up on new automotive and consumer projects on the PE side, as well as potential oil findings, and monetisation of oil and hydrocarbons.
  • We remain hopeful of oil discovery at its Well P1, where drilling results should be out by the end of 2Q18.

Weak 1Q18 due to higher drilling expenses at the oil & gas arm.

  • GSS Energy (GSS) reported weak 1Q18 results as its oil & gas arm is still loss-making due to the absence of revenue and higher drilling expenses (drilling activities were carried out in 1Q18), coupled with forex losses.

Growth at the precision engineering (PE) business remained strong.

  • Its PE business continued to deliver strong PATMI growth of 21.1% y-o-y in 1Q18, as well as healthy topline growth of 12.4%, on new projects and higher customer orders.
  • The division has also received compensation from one of its core customers due to delay in a large project, which should commence by 3Q18. As a result, we expect a few key projects to kick start in 2H18, which will likely support a stronger performance for GSS Energy.
  • GSS Energy also acquired a piece of land in Batam in April to relocate its existing facility operated under an extended long lease. The new facility should help meet expanded demand as its existing factory in Batam is close to full utilisation.

Monetisation of hydrocarbons and potential discovery of oil.

  • Back in 4Q17, management revealed that the drilling results of SGT-01 have led to the discovery of commercially viable hydrocarbons, ie gas. It announced that discussions are ongoing with various parties to finalise the agreement for offtake of its gas, which could result in monetisation for the group in 4Q18.
  • In addition, it commenced exploratory activities in nearby Well P1 in 1Q18, and is currently waiting for the results.
  • As this is a makeover well with oil found previously, we expect a higher rate of success for oil discovery, and with the existing agreement with Pertamina to offtake the oil already in place, we expect monetisation if oil is discovered by 3Q18.

Catalysts ahead, maintain BUY.

  • We remain optimistic of GSS Energy’ prospects and expect many potential catalysts to come in the near future, both in the PE and oil & gas segments. With rising oil prices, especially over the last few months, GSS Energy is expected to benefit directly.
  • With a positive outlook ahead affirmed by its recently implemented dividend policy, we believe GSS Energy is currently at an inflection point, and think that the current weakness represents a good opportunity to accumulate.
  • Maintain BUY and SOP-based Target Price of SGD0.25.

Jarick Seet RHB Invest | Lee Cai Ling RHB Invest | 2018-05-17
SGX Stock Analyst Report BUY Maintain BUY 0.250 Same 0.250