GSS Energy

GSS Energy | Buy

Target price: S$0.25

March 13 close: S$0.174

RHB Research, March 13

GSS Energy (GSS) has adopted a dividend policy of at least 20 per cent of profit after tax and minority interests (PATMI) for FY2018F-2019F. We believe that management is keen to reward shareholders by implementing this policy. This is also a positive sign and strong vote of confidence from management in its outlook, as its precision engineering (PE) business is enjoying healthy growth while it may potentially start selling oil in H1 2018.

We expect 20 per cent of PATMI to be equivalent to a potential dividend yield of 1.9 per cent for 2018, before it gradually increases to 2.4 per cent in 2019F.

Management revealed that demand from existing customers like Phillips and Lego has stayed strong, with orders growing 20 per cent year-on-year (YOY) this quarter. We expect the outlook for its PE arm remain positive in FY2018.

It is very hard to qualify as a manufacturer for Lego, and GSS is one in a small handful of companies that manufacture for Lego – especially in Singapore. This is a testament to the technical capability and quality of its PE arm. We expect margins to also be better than that of its usual orders.

In addition, we expect it to produce and sell oil by H12018. On Dec 13, 2017, GSS made a hydrocarbon discovery in its Trembul Operating Area. Management has stated that it expects production of gas to commence in Q4 2018. GSS is re-entering a makeover well, and we expect it to start producing and selling oil by H1 2018 – and to enjoy better margins and profitability if oil prices continue to increase.

GSS is currently at an inflection point. At its current share price level, the stock is significantly undervalued. It also provides a unique opportunity for investors to ride on the manufacturing boom and oil price recovery.

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