Singapore Equity: Federal International (2000)
Just a quick comment on this stock which posted very strong results without any one-off gains yesterday. Valuations look very compelling.
Company Name: Federal International (2000)
Share Price: SGD 0.04
Market Capitalisation: SGD 56m
From the company’s website:
Federal International is involved in business activities which support the regional Oil and Gas and Energy and Marine Logistics sectors. Specifically, the Group is engaged in four business areas:
1. Trading of mainly flowline control products and equipment such as valves and other related products for oil and gas and petrochemical industries
2. Design / Research & Development and Manufacturing (especially R&D for specialized sub-sea valves)
3. Marine Logistics – Chartering of vessels and barges to the marine and offshore oil and gas related industries
4. EPC and maintenance services and BOO or BOT services for projects in the oil and gas, energy and marine-related and environmental management sectors.
Frankly, this company has a pretty bad track record outside their core oil & gas equipment manufacturing and trading business and the company was loss-making in 2009, 2010, 2011, 2012 and 2014.
Given their poor track record and lack of any niche business segment that has a structural growth story or appears compelling to me, I will not include this in the model portfolio.
Federal’s losses over the years were largely attributable to failed ventures in coal mining, water treatment, marine logistics (anchor handling tugs) which led to impairments and disposal losses (including bad debts write-off from these disposed businesses).
With all the write-offs and impairments undertaken over the past few years, Federal has cleaned up its balance sheet and is focused on its core oil & gas equipment manufacturing and trading business.
Federal posted very strong numbers for 1Q FY15 with its core trading business seeing a 160% increase in revenue to S$57.5m from a wider range of products and penetration into more markets.
Net profit was S$16.0m.
Pre-tax margin was also surprisingly strong at 31.6%.
However, I doubt this kind of profit margin is sustainable for a trading business given that segment margins in prior years have generally ranged from 5.1% to 11.8%.
Revenue growth for the trading business, however, looks sustainable at least in the near-term with outstanding order book of S$47.3m.
Upside from this business comes from the recent announcement that Federal is “exploring potential opportunities to supply equipment on lease that is able to enhance the output from marginal oil and gas fields in Indonesia.”
Earnings per share for the 1Q alone was SGD 1.14 cents while book value per share was SGD 5.40 cents.
Assuming annualised revenue for the trading business at SGD 225m and applying historical average segment margin of 7.4%, Federal’s sustainable net profit after tax will be around SGD 11.9m or an EPS of SGD 0.85 cents per share.
Applying 6x P/E typical for a trading business yields a fair value of SGD 5.1 cents.
This excludes any earnings contribution from the land rig chartered out and potential charter of its FSO, Federal II, under its associate company.
So is Federal finally turning the corner?
We have to wait for future quarters to confirm this.
If so, then we could be looking at significant upside if sustainable margins turn out to be better than historical average and potential contributions from the FSO charter and equipment leasing to Indonesia kick in.