Federal Int (2000): A Diamond In the Rough

Federal International (2000) Limited, a leading procurement specialist and stockist for energy, utilities, infrastructure and oil and gas industry, is a diamond in the rough. Many of its peers in the O&G industry have been in the red but it is still making enviable profit and it even declared a better dividend at the ravaged state of the O&G industry.  

If Federal can maintain the rate of growth of 227% it achieved in 4Q2016 over 3Q2016, it can be more than a 10-bagger hands down within two years’ time. Even if the crude oil prices are to remain at this current level, I would wager that Federal should be at least a 2.5-bagger, i.e. hitting S$1.20, by November 2017.

Stellar financials

Current price = 0.48   

EPS (ttm) (cts) = 5.16

EPS (cts) 4Q2016 = 2.62       

p/e based on 2016 earnings = 9.30x

p/e based on annualised 4Q2016 earnings =  4.58x

NAV (S$) = 0.61        

p/b = 0.79x

Dividend (final +special) ($), xd on 8 May 17 = 0.02 

Yield = 4.17%

Net debt to total equity = 13.70%      

Growth of net profit after tax in 4Q2016 over 3Q2016 = 227.5%      

Growth of net profit after tax in 4Q2016 over 4Q2015 = 39%

PEG ratio based on 4Q2016/4Q2015 growth = 0.239           

Total shares outstanding = 140,767,484

Market capitalisation = 67.568 m

Free float = 45.27 m

Confidence displayed by Executive Chairman and CEO from his comments and actions

Commenting on the Group’s FY2016 financial performance and business outlook, Mr Koh Kian Kiong, Executive Chairman and CEO of Federal, said, “Due to the continued turbulence in the industry resulting in a weak operating environment, many of our peers in the industry are in the red. However, we are pleased to highlight that Federal has delivered a profit to shareholders for FY2016 of S$ 7.3 million. Management has executed well despite industry headwinds, demonstrated by our committed order book of S$ 94 million, and our prudent cost controls. Looking ahead in 2017, our partnership with PTG will begin to bear fruit through the Zawtika Development Project Phase 1C. Located in the Gulf of Martaban, Myanmar, the Zawtika Project is the newest of Myanmar’s four offshore gas sites with a total development project value of US$ 2 billion.

To reward our shareholders, we have proposed a special dividend of 0.5 Singapore cents in addition to maintaining our 1.5 Singapore cents first and final dividend. This represents a dividend payout of close to 40% for FY2016.”

Exclusive cooperation with a leading State-owned China conglomerate on O&G projects in Indonesia

An announcement was made on less than a fortnight ago, 20 April 2017, that Federal had signed an MOU with China Merchants Industry Holdings Co., Ltd (“CMIH”) for the two companies to co-operate exclusively on certain identified oil and gas projects in Indonesia.

CMIH is a wholly-owned subsidiary of the China Merchants Group, a leading state-owned China conglomerate headquartered in Hong Kong engaged in businesses encompassing energy, transportation, marine engineering, finance, and real estate. CMIH is a well-established engineering, procurement, construction, installation and commissioning (“EPCIC”) contractor, and its capabilities include the design and construction of offshore drilling vessels, specialized vessels, and vessel conversions. Its track record includes newbuild 400ft jack-up drilling rig Haiheng CJ50-1 for Tianjin Haiheng Shipbuilding & Offshore Engineering Service, and the conversion of the FPSO Cyrus Overall.

Commenting on the signing of the MOU with CMIH, Mr. Koh Kian Kiang, Executive Chairman and CEO of Federal, said, “The Group is pleased that CMIH has chosen it as its partner as CMIH seeks to expand its presence in Indonesia. Through the Group’s strong business ties and network in Indonesia, the Group and CMIH expect to secure oil and gas projects in the country.

Although the offshore and marine industry continues to experience uncertainty, the Group is pleased to note that the MOU with CMIH is recognition of both the Group’s expansive business ties in Indonesia, and its established capabilities in procurement, supply, design, manufacture, assembly, distribution and provision of flowline control products, other equipment and services for the oil and gas industry. The Group will strive to strengthen its partnerships with established industry players such as CMIH.

This is an exciting time for the Group, and we look forward to updating shareholders as details of our work become available.”

Mr David Zhu, Vice President of CMIH and the Chairman of Yu Lian Dockyards Limited, commented, “The growing Indonesian oil and gas market presents interesting opportunities for CMIH. CMIH is pleased to sign the MOU with Federal and to tap on Federal’s strong network. Together with the Federal Group, CMIH looks forward to growing its presence in Indonesia.”

Rampant buying spree from the beginning of 2017 by Executive Chairman and CEO

The Executive Chairman and CEO of Federal, Mr Koh Kian Kiong, has 45 years of experience and he oversees corporate strategy and expansion plans of the company. The company must have done very well and its prospects are very bright so much so that he kept buying his own company shares from Jan 2017 onwards:

3 Jan 558,200 shares at $0.24 apiece
17 Jan 240,800 at $0.25948 apiece

19 Jan 111,000 shares at $0.24367 apiece

27 Feb 100,000 shares at $0.30 apiece
28 Feb 100,000 shares at $0.2938 apiece
4 Apr 400,000 shares at $0.39 apiece

So, just this year alone, The Executive Chairman Mr Koh has bought a total of 1.07 percent of the company shares, amounting to $439k, to increase his shareholding in the company to the current 18.11 percent. This is a wonderful proportion of shareholding in that it means the shareholding is sizeable enough for him to have the impetus to work hard to achieve maximum profits for the company. I love this percentage of holding of the major shareholder as Mr Koh probably cannot stop any other interested and yet very rich individuals or companies to launch a takeover bid of the company. 

Another Executive Director, Koh Beng Guan Don, bought 100,000 shares on 6 Apr at $0.41974 apiece. Both Koh Kian Kiang and Don Koh would probably keep buying their company shares if not for the one-month barring period for insider trading before Federal’s 1Q2017 earnings result is announced on 9 May 2017.

When two key decision makers of the company are buying their own company shares, I believe there are good growth opportunities coming on stream that I have yet to totally figure out.

The seemingly poorer performance of FY2016 compared to that of FY2015 might have confounded most value investors

Revenue declined 30%, gross profit was down 57%, profit before tax -69%, profit after tax -66% and EPS -65%. On the surface, this is not a growth company based on year-to-year comparison.

The weaker performance stemmed in part from a fall in sales to China shipbuilders. But this company is in the O&G sector and when all other companies are in the red, it still can maintain its good profit with a trailing p/e of 9.3x at the current price which is the envy of many other O&G companies.

Federal recorded a profit of S$7.3 million in FY2016 despite a weak operating environment and it has a committed order book of S$94 million (as of 14 Feb 2017), including the procurement for the Zawtika Development Project Phase 1C. The management have the confidence that their good days are ahead so much so that they have proposed a special dividend of 0.5 Singapore cents per share in addition to a first and final dividend of 1.5 Singapore cents.

Unlike many of its contemporaries, Federal has low borrowings, its EBITDA/Interest expense is at a high and comfortable 9.085x at end of FY2016. The best of all is that its net profit after tax quietly grew at 227.5% in the 4Q2016 over that in the 3Q2016. I think there is a good chance that this explosive rate of growth is sustainable based on the solid orders received from its announcements made so far, the confidence expressed by its Executive Chairman and CEO and his rampant purchases made so far, and the generous dividend declared.

Big order is in the pipeline
Federal’s key partner, an established EPCIC (Engineering, Procurement, Construction, Installation and Commissioning) contractor, PT Gunanusa Utama Fabricators (PTG), is expecting to bid for projects totalling about USD1 billion in 2017. From my estimation, this should provide S$300 m to its 2017 order book, and this should generate at least S$12 m per year if the order book can be completed within 2 years. Together with the existing committed order book of $94 m, the profit per year should be around $17.35 m, and this stellar performance should bring down Federal’s p/e to be around 3.9x.

PTG currently has an order book of US$305 million for the offshore platform fabrication and installation under the Zawtika project awarded by Thai state-owned PTTEP International. Federal has been working closely with PTG in its upcoming tenders and it also continues to provide procurement services to PTG for projects undertaken by PTG under a master procurement agreement both parties signed in 2015.

Federal products are on approved vendor lists of major oil companies which include such giants as Petrochina, CNOOC, BP, Chevron, Petronas, Pertamina, PTTEP, Total. It also has its own brand of flowline control products.

PTG and Federal are close-knit given that Federal’s founder and Executive Chairman and CEO, Koh Kian Kiong, is also the President Commissioner of PTG. Also, an executive director of Federal, Don Koh, is a Commissioner of PTG. Also, Federal has potentially a 62.5% stake in PTG via a US$9 million loan to a shareholder of PTG. This shareholder of PTG must be a very influential guy in the circles to bring in businesses for Federal.
Another good news will be that plan is afoot for PTG to be listed on the Jakarta Stock Exchange in 2018 and this will mean great profits and rewards for Federal.  

Thin trading liquidity of its shares can be a strength

The market capitalisation of Federal is around $67.6 m based on the closing price of 48 cts on 28 April 2017. The free float is only S$45.3 m. It is quite difficult to accumulate the shares of Federal without pushing up its price due to its thin trading liquidity.

But the illiquidity can be taken as its strength too as there is no need for a big volume to push its share price through the roof. What is important for buying an illiquid stock is that it must be an undervalued gem and you must be prepared to hold it for the long haul till Mr Market uncovers its intrinsic value.

What is next for Federal?
Posting the strongest growth streak in more than six years, Singapore Nodx grew for the fifth straight month in March, expanding by 16.5 percent compared to the same period last year. The latest sign that things are on a roll and heading for the moon came from Singapore’s PMI which logged its seventh straight month of expansion in March. It came in at 51.2 last month, its highest reading since November 2014, up from 50.9 in February. From a bigger picture, there are similar trends in some key markets such as China, the US, euro zone, Vietnam, the Philippines, India and Indonesia, which bodes well for the outlook of both major and regional economies in the near term. This leading indicator should give Federal a further shot in the arm both directly and indirectly. 

Federal has established presence in fast growing O&G markets in Indonesia (53% of its total 2016 sales), China (19%), Singapore (13%) and Vietnam (4%), and its scalable business alongside its solid order book will propel it to the moon under these favourable conditions.

Federal weekly chart showing the historical high at $5.  The 6-month target price at $1.20 is still a far cry from that historical high.

Federal 2-cent dividend will be xd on 8^th May and payable on 25^th May 17. Its next earnings announcement is likely to be made on 9 May 2017. A very solid results should be on the cards and one good way of making some solid capital gains is to buy the stock before the result is released.  

I believe I have unearthed the diamond and if you love shine and sparkle as much as I do, you will have to join me in giving it a fine cut for its brilliance to be fully demonstrated.

Superphang
http://superphang.blogspot.sg