AP Oil(Code: 5AU, Price:S$0.20, Target Price:S$0.43, P/B= 0.8, P/E=6.3, market cap=S$32.9m)
Background: Incorporated in 1975(listed in 2001 and upgraded to mainboard in 2003), engaged in manufacturing of petroleum lubricating oil, including wholesale of oil and fuel, dealing in paraffin wax, lubricating oil grease. Manufacturing segment manufactures range of lubricating oil and fluids and specialty chemicals for industrial, automotive and marine applications, and providing blending services(61% of revenue). The manufactured goods were sold under the Company’s brand names. The trading segment trades in base oil and additives and specialty chemicals(19.5% of revenue). The franchising segment includes trades in raw materials for products under the Company’s brand names(19.7% of revenue).
Economic moat:
- Customized solution for industrial lubrication needs(metal working oil, stamping and forming oil, heat transfer oil, gear oil, hydraulic fluid, compressor oil, transformer oil etc) – Differentiated focus
- Strong R&D capability and focus on quality
- Brand name is established; relatively high switching cost(customer won’t risk damaging the machine if switch to another brand)
- Exported to over 20 countries; Singapore generated 64% of revenue(Bulk of the figure included marine lube delivered to foreign vessels at Singapore port and specialty chemical that sold to SG multinational companies and subsequently re-exported to other countries). Vietnam, Myammar and Bangladesh accounted for 25.6% of revenue.-->Emerging Market Exposure
Profitability Analysis:
2013
|
2012
|
2011
|
2010
|
2009
| |
Net Profit Margin
|
8.09%
|
5.26%
|
6.39%
|
4.21%
|
8.51%
|
Asset Turnover
|
1.33
|
2.08
|
1.63
|
2.09
|
1.73
|
Return on Asset
|
10.76%
|
10.92%
|
10.43%
|
8.78%
|
14.72%
|
Equity Multiplier
|
1.18
|
1.19
|
1.25
|
1.21
|
1.26
|
Return on Equity
|
12.73%
|
12.96%
|
12.98%
|
10.65%
|
18.51%
|
Piotroski F score
|
7
|
8
|
7
|
6
|
8
|
Profitability
| |||||
Positive Net Income
|
1
|
1
|
1
|
1
|
1
|
Positive Operating Cashflow
|
1
|
1
|
1
|
1
|
1
|
Increasing ROA
|
0
|
1
|
1
|
0
|
1
|
Operating CashFlow > Net Income
|
1
|
1
|
1
|
0
|
1
|
Liquidity, Debt and source of fund
| |||||
Increasing current ratio
|
1
|
1
|
0
|
1
|
1
|
Decreasing ratio of long term debt to total assets
|
1
|
1
|
1
|
1
|
1
|
No increase in outstanding share
|
1
|
1
|
1
|
1
|
1
|
Efficiency
| |||||
Increasing Gross Margin
|
1
|
0
|
1
|
0
|
1
|
Increasing Asset Turnover
|
0
|
1
|
0
|
1
|
0
|
Valuation: 1) Using residual income method: If ROE earning more than Required Return, then it should be atleast selling at the Book Value + Residual Income 
2) Using FCFF: Assuming sales growth =2.3%, EBIT margin= 8.65%, WACC = 10%, long term FCF growth rate =2.47%, intrinsic value= S$0.43 per share
FREE CASH FLOW (FCF)
|
2014
|
2015
|
2016
|
2018
| ||
Profit after tax
|
3.496
|
3.612
|
3.749
|
3.872
|
3.904
| |
Add back depreciation
|
1.055
|
1.055
|
1.055
|
1.055
|
1.055
| |
Change in net working capital
| ||||||
Increase in operating current assets
|
-0.918
|
-0.338
|
-0.346
|
-0.354
|
-0.362
| |
Add increase in operating current liabilities
|
-0.947
|
0.129
|
0.132
|
0.135
|
0.138
| |
Subtract capital expenditures
|
-1.143
|
-1.145
|
-1.148
|
-1.150
|
-1.152
| |
Subtract increase in other assets
|
0.000
|
0.000
|
0.000
|
0.000
|
0.000
| |
Add back after-tax interest
|
0.026
|
0.025
|
0.007
|
0.005
|
0.097
| |
FCF
|
1.568
|
3.337
|
3.449
|
3.563
|
3.680
| |
Valuation
| ||||||
WACC
|
10.00%
| |||||
Long-term free cash flow growth rate
|
2.47%
| |||||
Year
|
2014
|
2015
|
2016
|
2017
|
2018
| |
FCF
|
1.568
|
3.337
|
3.449
|
3.563
|
3.680
| |
Terminal
|
50.107
| |||||
Total
|
1.568
|
3.337
|
3.449
|
3.563
|
53.787
| |
Discounted value
|
44.685
| |||||
Add back initial cash
|
26.211
| |||||
Firm value
|
70.896
| |||||
Subtract total debt value
|
0.248
| |||||
Implied equity value
|
70.648
| |||||
Number of shares outstanding
|
164.53
| |||||
Implied value per share
|
0.43
|
Thesis for investing: Low P/B<1, Low P/E <10, No long term debt, ROE > 12% for the past few years. Solid F-score history(>=6) for the past few years. Cash per share = S$0.159
Risk: 3 major customers contributed 58.8% of revenue of 2012, 2 major customers contributed 40.63% of revenue of 2013; Low liquidity, same as the SG small caps, daily transaction lots around 50 lots, Optimum size of asset allocation 20-30K SGD, need to hold for long term(3 years+)
Family ownership: Ho Chee Hon, Deputy CEO, son of CEO, increase holdings from 1.83 mils shares to 3.16 mil shares with S$0.21 per share on 11th March 2014. Total percentage of share holding by CEO Ho Leng Woon, his wife and his son = 49.9%
