Excerpts from RHB Research report

Analysts: Jarick Seet & Lee Cai Ling

With new projects in the auto and consumer space, we expect FY18 to be even better for GSS.

GSS Energy

Share price:
16 c

25 c

Trading at 9x FY18F ex-cash P/E, valuations just account for the Precision Engineering (PE) business.

With oil & gas discovery affirmed in Dec 
2017, 1P reserves already conservatively estimated at SGD0.29/share, and oil & gas revenue to come in 1H18, we think GSS is significantly undervalued and provides a unique opportunity for investors to ride on the manufacturing boom and oil price recovery.

As a result, we initiate 
coverage with a BUY and with an SOP TP of SGD0.25 (56% upside).


GSS Energy’s (GSS) precision engineering (PE) segment to continue strong growth on new projects. We expect new projects in the automotive and consumer space to fuel more growth into FY18.

JarickSeet11.14Initiate coverage with a BUY, with the oil & gas business absolutely free. We think GSS is significantly undervalued and provides a unique opportunity for investors to ride on the manufacturing boom and oil price recovery. As a result, we initiate coverage with a BUY and an SOP TP of SGD0.25.

-- Jarick Seet
RHB Research analyst

There have been ongoing trials with a new customer in the consumer space, and GSS expects to start full scale production by 1H18 (which can contribute 15% topline growth for the segment in FY18F). However, we understand that this project’s margins will be lower.

All in all, we expect the outlook to still be positive for its PE arm in FY18.

Revenue from oil & gas expected in 1H18 and 4Q18, respectively. On 13 Dec 2017, GSS made a hydrocarbon discovery in its Trembul Operating Area.

Management has stated that it expects production of gas in 4Q18. GSS is 
re-entering a makeover well and we expect it to start producing 200 barrels of oil a day by 1H18 – and to enjoy better margins and profitability if the oil price continue to rise.

Mistakes learned – vital change in operation cooperation agreement. GSS is now the main party to the contract with state-owned PT Pertamina, to assist it in the production of petroleum in the Trembul Operation Area. Payment is made to Pertamina directly (not through a middle party like before), reducing the risk of payment defaults.

There is also a cost recovery scheme in place that allows GSS to recover opex and capex incurred through 80% of sales. This is a huge positive as it can then replenish cash flow, allowing it to drill more wells to increase production capacity at a faster pace.

Potential upcoming dividend policy to show confidence as to incoming oil revenue. With the oil & gas business likely to start producing revenue in 2H18, along with the already profitable PE business – as well as a net cash balance sheet – we expect the company to start distributing dividends, representing 20% of PATMI in FY18F.

This would result in a potential dividend yield of 2% 
for 2018F, increasing to 2.5% in 2019F.

USD110m of 1P oil & gas reserves vs market cap of SGD79m

GSS’ total estimated 1P reserves totals 18.36 million barrels of oil. We assume an oil price of USD60.00/bbl and apply a 15% risk discount to the oil price, as well as a 50% discount to its 1P (proved reserves) reserves to be more conservative.

The total value of the oil reserves, after 
accounting for the GSS entitlement split of 23.5%, would still be worth about USD110m, or SGD0.29 per share, much higher than its current share price of SGD0.16.

are thus actually getting the oil & gas production business and its oil and gas reserves for free, while at the same time buying the manufacturing business at valuations lower than that of listed peers.

Full report here.

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