Trade Wise: Value emerges in APB as O&G stocks fall

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CRUMBLING crude oil prices may spell doom for oil and gas-related stocks — many have tumbled to multi-year lows — but for risk-on investors, there is still value to be found in the sector with valuations becoming more attractive and dividend yields rising.

One of the O&G-related stocks that reflect such value is APB Resources Bhd, an established process equipment fabricator involved mainly in the petrochemical, oleochemical and energy sectors.

Unlike the tough outlook for vessel operators in the offshore segment of the O&G industry, APB is said to be well insulated as it produces pressure vessels, heat exchangers and heat recovery steam generators — equipment that will be needed in the ongoing refinery and petrochemical integrated development (RAPID) project in Pengerang, Johor.

According to analysts, national oil company Petroliam Nasional Bhd (Petronas) is unlikely to cut its commitment to RAPID despite the current low oil price environment.

APB has fallen 34.62% from its 52-week high of RM1.56 on Aug 5. At its RM1.03 close last Friday, however, the stock was still 13% higher year to date, had a market capitalisation of

RM114.2 million and was trading at 9.3 times its historical earnings of RM12.19 million or 11 sen a share in its financial year ended Sept 30, 2014.

The stock is also trading well below the sum-of-parts valuation of RM2.07 ascribed by Hong Leong Investment Bank’s analyst Jason Tan Yat Teng.

APB’s net assets per share stood at RM1.61 in FY2014.

Since the company was listed on Bursa Malaysia in May 2004, it has been delivering uninterrupted profits and consistently paying a dividend of 6.5 sen per share, except in FY2011 when it paid three sen per share.

In FY2014, APB declared a first interim dividend of 3.5 sen per share in May, followed by a final dividend of three sen per share. Its closing price of RM1.03 last Friday translates into a historical dividend yield of 6.31%, making it one of the few O&G stocks to give a decent dividend return. By comparison, the dividend yield of its peers CB Industrial Product Holding Bhd and Boilermech Holdings Bhd, among others, stood at 2.26% and 0.91% respectively.

Note that the valuation ascribed by Tan of Hong Leong Investment Bank was published on July 31, when Brent crude oil price was still at a high level of US$106.80 per barrel. Since then, Brent has tumbled 33.99% and closed at US$70.50 per barrel last Friday.

Tan tells The Edge that the downstream segment of the O&G industry is not expected to be as badly affected by low crude oil prices as the upstream segment. “APB’s fortunes depend on whether it will get contracts from Petronas for the RAPID project. While the group is not directly bidding for any part of the project, it could benefit from subcontracts, especially on the process equipment side.”

He notes in a Dec 1 report that while Petronas CEO Tan Sri Shamsul Azhar Abbas has declared that the national oil company may cut capital expenditure by 15% to 20% next year amid low oil prices, the US$27 billion RAPID project, which has received final investment decision, is unlikely to be affected by the spending cut.  

The view that the downstream segment of the O&G industry might be insulated from the bearish crude oil prices is shared by other local analysts, many of whom have upgraded their recommendations on the relevant players.

Mohshin Aziz, an O&G analyst with Maybank Investment Bank, was among the first to upgrade Petronas Chemicals Group Bhd, the bellwether of Malaysia’s petrochemical industry, to a “buy” from a “hold” last Thursday.

“The petrochemical market is in a balanced state and everyone is behaving rationally. Despite what is happening to crude oil prices, this industry is not in a state of panic or crisis,” he says in a Dec 4 report.

Industry observers say the stable outlook for the downstream segment, especially in the petrochemical industry, will prop up process equipment manufacturers, including APB. Demand for process equipment is going to be stable next year, says Tan.

Besides supplying process equipment to the petrochemical industry, APB also operates in the oleochemical industry, which, according to APB chairman, managing director and largest shareholder Yap Kow @ Yap Kim Fah, has greatly helped the group ride out the downturn in fabrication demand in the past few years.

“In the coming years, the group should benefit from increasing capital expenditure due to rapid expansion of oil palm acreage and demand for oleochemical end-products, particularly in Asia,” states Yap in the group’s 2013 annual report.

On the operations side, APB’s order book stood at RM70 million the last time Tan of Hong Leong Investment Bank got in touch with the group in July. This should sustain APB for at least nine months, he states in his report. “We understand that the contract duration for process equipment is relatively short — from six to nine months. Past track records suggest that order book replenishment rate will offset the contract burn rate and sustain revenue going forward.”

Judging from the group’s FY2014 results, with net profit up 17.6% to RM12.2 million year on year, APB is doing well operationally. It undertook higher-margin contracts in the final quarter ended Sept 30. As a result, 4QFY2014 revenue declined 19.5% to RM30.2 million y-o-y while gross margin rose to 27.8% from 20.4%. Gross profit also increased from RM7.7 million to RM8.4 million in the quarter.

APB has a clean balance sheet with no borrowings. Its cash and cash equivalents stood at about RM40 million as at Sept 30, constituting 35% of its market capitalisation of RM114.2 million last Friday.

This article first appeared in The Edge Malaysia Weekly, on December 8 - 14, 2014.