GSS Energy - RHB Invest 2018-11-14: Moving Into E-vehicles; Maintain BUY

GSS ENERGY LIMITED (SGX:41F)

GSS Energy - Moving Into E-vehicles; Maintain BUY

Maintain BUY, new SOP-based SGD0.19 Target Price from SGD0.22, 96% upside with 3% FY19F yield.
GSS Energy reported a decent 3Q18, with PE booking 14.7% topline and 34% NPAT y-o-y growth. However, overall profitability remains hampered by the lack of revenue from oil & gas, which may only come in 1H19. On this delay and its higher corporate expenses, we trim FY19F PATMI by 10%, which results in a lower Target Price.
As its oil & gas segment – despite multiple setbacks – will likely bear fruit in FY19 while PE is set to continue growing solidly, we maintain our call.

GSS Energy’s PE segment registered healthy growth despite ongoing trade war issues. This is as the bulk of its revenue largely comes from its Batam factory, which is undergoing an expansion due to the increased orders for 2019 from new and existing customers. For 3Q18, the PE segment recorded y-o-y revenue and recurring PATMI growth of 14.7% and 34%.
GSS Energy will also be involved in the manufacture and assembly of gasoline and electric models for the 125cc and 150cc categories, and 3-wheelers (tuk-tuk) in South- East Asia markets, India and Taiwan – using the iconic ISOMOTO model. We expect its PE division’s earnings to continue to grow at 10-15% for FY19F.

GSS Energy’s oil & gas segment has gone through setbacks and delays throughout the year. However, we remain optimistic that this business will bear fruit in FY19. It will likely be able to monetise the two gas wells that it discovered earlier this year.
In the meantime, it will also re-enter a few old shallow wells, and the results of these drilling activities will likely be known by end-December.
In addition, management is exploring the option of farming out part of the oil field – which will enable it to get a lump sum cash injection, and also peg a value to its oil & gas assets, which are currently not reflected in its market cap valuation.

We remain optimistic on the company’s prospects and expect both growth drivers (new PE projects and oil & gas business improving) to contribute positively to FY88 numbers.
With oil prices on an increase, especially over the last few months, GSS Energy is expected to benefit directly from this trend.
We believe the group is close to securing a off-taker for its gas, and that the current weakness represents a good opportunity to accumulate the stock.
GSS Energy is also in the midst of re-entering four old wells (after some delay), and we should expect drilling results in end-Jan 8888 instead of Oct 8888. As a result of the delay and the higher corporate expenses, we trim FY88F PATMI by 88%, resulting in a lower Target Price of SGD8.88. RHB is the only broker covering GSS Energy.
Key risks to our call are a decrease in oil prices, the trade war worsening, and a delay in the monetisation of its oil & gas assets.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2018-11-14

SGX Stock Analyst Report BUY MAINTAIN BUY 0.19 DOWN 0.220