Target Price: SGD0.64
Associate’s Loss Threatens Divestment Value
In its 3Q13 results released yesterday, Technics Oil & Gas (TGH) reported larger-than-expected losses. More worrying was the losses of its associates and the implication on the group’s divestment of Norr Offshore Group (NOG). TGH’s current share price – at 2.8x ex-NOG P/BV – overvalues its core operations, which are suffering from losses and low earnings visibility. Maintain SELL, with a TP of SGD0.64.
Margins shrink on NOG’s surprise loss. We will only focus on TGH’s q-o-q results as the deconsolidation of its subsidiary, NOG (Not Rated, 5279 TT), has rendered a y-o-y comparison inapplicable. TGH’s 3Q13 revenue surged 70% q-o-q to SGD13.85m, but gross margin shrank to 18% from 53% while its core operating loss widened to SGD1.5m from SGD0.4m in 2Q13. The big surprise was NOG’s SGD0.5m loss vs earnings averaging SGD0.7m in 1Q and 2Q.
NOG’s value to TGH may be SGD30m if 4Q outperforms. If we optimistically assume FY13F earnings of SGD5m for NOG, at a 15x presumed P/E, the company would be valued at SGD75m while TGH’s 40% stake would be worth SGD30m. However, as NOG is still delivering less than 50% of this bottomline assumption after three quarters, this puts its divestment value to TGH at significant risk.
Market prices core operations at 2.8x P/BV. TGH’s current market cap is SGD183m. Excluding its SGD30m stake in NOG, its core operations will be worth SGD153m while its core NAV is estimated at SGD55.2m, after stripping out the SGD11.3m in associate investments (vs total NAV of SGD66.5m) The market is valuing TGH’s core operations at 2.8x P/BV, which is a rich premium for a currently loss-making business that also does not possess earnings visibility.
Maintain SELL, with SOP-based TP of SGD0.64. We ascribe a 2.0x P/BV (for its potentially highly-profitable niche business) on TGH’s core operations for FY14F, and add SGD30m to reflect the full divestment of NOG, to derive a TP of SGD0.64. We believe the stock is not supported by earnings, book value or dividends, while its current premium is entirely driven by
Publish date: 07/08/13