SINGAPORE (March 30): KGI Securities likes GSS Energy given its business is picking up momentum although markets has not priced in its oil and gas business which is expected to begin oil production soon.
Formerly known as Giken Sakata, GSS is a precision engineering (PE) company with operations in Singapore, China and Indonesia. KGI recently visited GSS’s PE facilities in Batam, Indonesia and came away impressed by the scale of its operations.
Meantime, GSS is expected to begin producing oil in 2H17 under a cooperation agreement with Indonesia’s state oil company, PT Pertamina EP.
The 49:51 joint venture between GSS and a commercial vehicle by the Central Java provincial government runs for 15 years. According to a Qualified Person’s Report, the area contains 24.3 million barrels of resources up to a depth of 800 metres.
GSS is expected to spend around US$8 million ($11.2 million) over three years although the actual amount may be less once it starts producing oil and cashflows allow it to be self-sustaining.
GSS is trading at 8.9xFY16 P/E vs 11.4x peer average. However, stripping out one-off gains of $3.2 million from the disposal of an O&G subsidiary and $2.4 million for land compensation in China would imply a core P/E of 18.8x. This may improve based on the various growth initiatives undertaken by the group for both its business segments. GSS has $14 million of net cash that it can tap on to fund inorganic growth.
PE sales reached a new three-year high in FY16 of $75.7 million on the back of favourable product mix and higher value engineering efforts. Revenue growth should also pick up this year as GSS plans to begin operations at its new factory in China by mid-2017 while also expanding its Electronic Manufacturing Services business.
GSS took a $33 million write-down in FY15 from its first entry into Indonesia’s O&G gas sector, which was due to its partner’s non-compliance with contract terms resulting in the contract’s cancellation.
Still, GSS is pressing ahead with its latest investment given the low cost of production (less than US$20/bbl) and contract terms that allow it to recover most of its costs before profits are split with Pertamina.
Shares of GSS are trading 0.2 cent lower at 18.8 cents.
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