Technics Oil & Gas
Target Price: SGD0.64
Two Disquieting Words: Profit Warning
TGH issued a profit warning last Friday, confirming our earlier fears it may go into losses in 3QFY13. We see no fundamental reasons to hold the stock given TGH’s poor orderbook, deteriorating profitability, and a gap year in earnings before its compressor-leasing business builds sufficient volume. It is no longer a dividend play, with zero dividend likely this year. Maintain SELL, with TP of SGD0.64.
• Profit warning confirms our SELL call. In our 17 May report on Technics Oil & Gas (TGH), “Tough Times Are Here”, we drew attention to a potential loss this quarter as there had been no order from VietSovPetro, which typically account for a large part of its bottomline. The operational leverage employed hinted strongly at a sharp deceleration in earnings which has now materialised.
• Compressor-leasing biz too small to create meaningful impact. The recent compressor-leasing contracts had total values in excess of SGD20m, but this would be spread over seven years. In effect, each compressor lease brings in about SGD1.6m of revenue a year, which would not contribute significantly to TGH’s bottomline.
• Earnings gap year; No dividends. We see a gap year in earnings now with the core business slowing sharply and the new compressor-leasing business not having built up sufficient volume to make up the difference. We had earlier slashed our dividend expectation to zero this year, and we now extend that to FY14F until we see further clarity in earnings.
• No longer a dividend play. We believe that some investors view TGH as a dividend play as it had paid out 11/12/8 cents in the previous three years. This capital-reduction exercise has ended, with the company’s retained earnings now near zero. The funding requirements for the compressor-leasing business further support our no-dividend view.
• No reason to hold the stock. SELL. We see no fundamental reasons to hold the stock today, given that it has neither earnings nor dividend nor book-value support. Any potential contribution from the spin-off of Norr Offshore Group has already been priced in with the high premium to book value. Maintain SELL with TP of SGD0.64.
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Publish date: 05/08/13