Date: August 16, 2010
by Roger Tan, SIAS Research
Technics Oil and Gas Limited (Technics) was proud to announce another quarter of stellar results at their lunch briefing last Friday. In the third quarter of 2010, the company made a net profit of S$6.9m compared to just S$2.2m last year. For the nine months of FY10, net profit was up 197% compared to the same period last year.
The higher profit came on the back of lower revenue. In the first nine months of FY10, Technics earned some S$79.3m of revenue – 18% lower than the same period last year. Nevertheless, improved gross margin helped to make the improvement in profit possible. Gross profit margin increased from around 30% in the first nine months of FY09 to 37% for the nine month period of FY10.
The company explained that the improved margins can be attributed to the “fasttracking of certain EPCC (Engineering, Procurement, Construction and Commissioning) projects which resulted in cost savings in the engineering works and better bargaining power on quantity discounts”. The management is confident that they can maintain a 35% gross margin going forward.
Technics designs, engineers and fabricates process modules and equipment. These products are then integrated to form the operating system for production operations and storage application not only in offshore but also onshore oil and gas exploration and production activities. It has three business segments: Engineering, Procurement, Construction and Commissioning (EPCC), Contract Engineering (CE) and Procurement, after‐sales services and others (PS).
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Technics has also announced, on 10 Aug 2010, its intention to dual list on the Taiwan Stock Exchange through the offering of Taiwan Depository Receipts (TDRs). The dual listing is expected to widen the company’s investor base and increase trading liquidity for its shares. Technics’ share price has risen from S$0.51 on 1 Jun 2010 to S$0.82 last Friday (13 Aug 2010).
CIMB Securities has downgraded Technics from “Buy” to “Hold” on the grounds that “the stellar results have already been priced in, offering a chance for investors to cash in”. They also highlighted that the company’s “limp order books impairs their (the analyst’s) earnings visibility”. That call may not necessarily be fair to the company.
Other than in 2008, Technics has been able to earn a ROE of above 15% over the last 3 years. In the first nine months of this year, its annualized ROE is over 44%. Furthermore, CIMB has projected the company’s ROE for FY11 and FY12 at around 27% and 25% respectively – much higher than the 15% mentioned.
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At the briefing, Executive Chairman and Group Managing Director Robin Ting also explained that fast-tracking certain EPCC contracts resulted in the early completion of these projects. Though this has improved earnings and profit, it also caused order books to look weak.
From our conversation with the management, we sense that the company is always on a lookout for more projects and is always working on ways to enhance its recurring income. Resting on past laurels is never their prerogative.
Moreover, Technics is expecting more funds to flow into the company from the listing of TDRs and the expiry of their corporate warrants. This will enhance the company’s cash position and help it to secure larger EPCC contracts in the future.
At the current price of S$0.82, the company is trading at a PE of around 8 times (based on an annualized FY10 EPS of S$0.104) and a PB ratio of around 3 times.
SIAS Research is considering covering this company.
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