There is every prospect of Federal being a multi-bagger

Federal's 1Q2017 result was released on 5 May 2017 with its profit declining 69% in comparison with that of 1Q2016. I am not too concerned about the short-term blip of Federal’s performance and I want to give another perspective to why there is every prospect of Federal being a multi-bagger going forward:

(1)     Confidence displayed yet again by Executive Chairman  and CEO on the company’s expansive growth

The management of Federal is forward-looking and the confidence was expressed clearly by the Executive Chairman and CEO of Federal: Our sound balance sheet underpins our profitability and ability to win new business. Looking ahead in 2017, we are well placed to benefit from our strategic partnerships with CMIH and PTG. We are focused on forming strategic partnerships in order to strengthen our competitiveness in the trading business. Our MOU with CMIH is recognition of both the Group’s expansive business ties in Indonesia, and its established capabilities in the oil and gas industry.

As Indonesia plans up to US$ 200 billion of investment in order to increase output at its oil and gas fields and expand refining capacity, this is a particularly exciting time for Indonesian offshore marine contractors.”

The CEO did not just pay lip service but he kept increasing his stake in the company, buying about 1.07% of the company shares in the period between 3 Jan to 4 April 2017. Now that he has pocketed the 2-cent dividend (4.167% yield based on the last done price of 48 cts) for every share he owns, he can use the proceeds to start his purchases again. I estimate that the proceeds can be used to purchase another 0.755% of the total company outstanding shares and we are not talking about pledging probably some of these purchases with finance institutions which he did so during his last purchase made on 4 April 2017, involving 400,000 shares at 39 cts apiece. Now that the barring period for his purchase of the company shares has been over after the release of the 1Q2017 result, he may start his buying spree again if his confidence has not wavered a bit.

When the CEO who knows the company better than anyone else keeps buying his company shares, it means he has confidence in the long-term growth of the company. Likewise, I am in for the long haul till my target price is hit.

(2)     Nearsightedness will cost you dearly

I remember clearly AEM announced a poor FY2016 result over FY2015’s on 23 Feb 2016 with its profit after tax dropping 19.5 percent, after my AEM post was out on 12 Feb 2017 and a lot of punters, without going into the details of its financials and the positive actions of the company, threw the gem away and regretted big time when it reported subsequently a very solid 1Q2017 result on 24 Apr 2017. Based on AEM’s closing price of $2.36 on 5 May 2017 and taking 1-for-2 bonus issue into consideration, AEM has surged 247% in less than 3 months since I posted my recommendation in InvestingNote on 12 Feb 2017.

Always do your due diligence as there is no shortcut to make money.

(3)     Many positive developments begin to take shape

(A) The Group has a committed order book of S$ 86 million (as of 24 April 2017), including the procurement for the Zawtika Development Phase 1C Project.
(B) On 20 April 2017, the Group announced it had signed a Memorandum of Understanding (“MOU”) with China Merchants Industry Holdings Co., Ltd (“CMIH”). Under the MOU, the Group and CMIH will co-operate exclusively on certain identified oil and gas projects in Indonesia. The Group is still in discussion with the parties concerned on the projects.

(C) The Group is also in discussion on the possible charter of its 1,200 HP land drilling rig which is located in Jakarta, Indonesia.
(D) The Group continues to benefit from a steady source of recurring earnings from CNOOC’s charter of Federal II, a floating, storage and offloading vessel owned by PT Eastern Jason (“PTEJ”), in which the Group has a 30% interest. Federal II is chartered to CNOOC until September 2018 with an option to renew the charter for a further 5 years.

(4)    Conclusion

I will not throw the baby out with the bathwater at this stage. I know more good news from the company is in the pipeline and it will have very solid subsequent financial reports and there is no doubt about it.

When others are in doubt but not doing their due diligence and become fearful, it presents a golden opportunity for me to accumulate more of this gem.

Superphang
http://superphang.blogspot.sg