GSS Energy - RHB Invest 2019-05-14: Cost Down + Strong Competition Hits Margins


GSS Energy - Cost Down + Strong Competition Hits Margins

  • Downgrade to NEUTRAL from Buy, new DCF-based Target Price of SGD0.08 from SGD0.17, 1% downside.
  • GSS ENERGY LIMITED (SGX:41F)’s 1Q19 loss of SGD0.2m stemmed from price competition and cost-down pressures shrinking margins, as well as higher depreciation costs from new machines.
  • We expect margins to improve, but remain weaker than last year’s. Monetisation of gas wells will likely also be delayed. As such, we cut FY19F/20F PATMI by 45%/35%, which leads to a lower Target Price.

Margins impacted negatively by cost-down pressure and stiff competition.

  • While revenue was maintained, margins narrowed to 16.1% in 1Q from 23.3% in 1Q18, mainly due to stiffer price competition, cost-down pressures from customers as well as changes in its product mix.
  • Going forward, margins should improve in subsequent quarters – albeit still lower than that of FY18.

Oil & gas still dragging on earnings.

  • GSS ENERGY LIMITED (SGX:41F)’s oil & gas business suffered from many setbacks and delays throughout the year. It is at an advanced stage of obtaining regulatory approvals to monetise the two proven wells – but could see further delays due to the uncertain timeline of getting the green light from the authorities. Until that happens, this segment will likely continue dragging on earnings.
  • A silver lining, however, could come from management 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).

A challenging year ahead.

  • With 1Q19 margins significantly below our estimate, coupled with a tepid macro-economic outlook, we expect FY19 to be a tough year for GSS Energy.
  • Overall, margins should be weaker y-o-y, while there could be further delays from the oil & gas segment. As such, we slash FY19- 20F PATMI by 45%/35%, which leads to a lower DCF-based Target Price of SGD0.08.
  • Downgrade to NEUTRAL.

Key risks.

  • The downside to our call is an increase in oil prices, the trade war worsening and a delay in the monetisation of its oil & gas assets. The reverse of these factors would be upside risks.
  • RHB is the only broker covering this counter.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2019-05-14
SGX Stock Analyst Report NEUTRAL DOWNGRADE BUY 0.08 DOWN 0.170