GSS ENERGY LIMITED (SGX:41F)
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
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Lee Cai Ling
RHB Invest
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https://www.rhbinvest.com.sg/
2019-05-14
SGX Stock
Analyst Report
0.08
DOWN
0.170
