Saturday, 27 September 2014
AP Oil is a company that engages in distribution and production of lubricating oil used in automotive, shipping and industry machinery. The company also produce specialty chemicals used in shipping and oil/gas industries for cleaning and maintenance purposes. Its products are marketed throughout Asia and as far as Middle East. It has been listed on Catalist in 2001 and was upgraded to the Mainboard in 2003.
The company appeared in my radar due to my chat with a friend who invests like Walter Scholes and specialises in unearthing stocks trading way below the RNAV. He impresses with his depth of research and a good grasps of quantitative valuation, and his stock calls had good track record for the past few years.
Back to AP Oil. It is trading at a 38% discount to its NAV.
Applying a 50% discount to its inventory and 1/3 discount to all other non-core and unstable assets, AP Oil is trading at fair value to its RNAV, with a P/RNAV of 1.06.
It has total liabilities of 12.9m, and cash balance of 22.3m.
Such valuations are hardly sufficient as an investment case. Companies usually trade at cheap valuations for various reasons: it has not been earning much, the market is shrinking as a sunset industry, its cash flow is erratic etc. AP oil could be very cheap quantitatively, but qualitatively there could be something wrong that warrant the company to trade at this value.
So I went on to look at other important aspects of the business to ascertain its operation efficiency, earnings growth, dividend track record.
· Consistent revenue hovering around 60m to 80m past 5 years. Likewise for gross profit: 12m to 14m; net profit: 4m to 6m
· Stable gross and net margin: 16-20% and 6-7% past 4 years
· Positive operating cash flow past 4 years around 4-5m. It had -1m of ops cash flow during FY08 GFC period
· ROE: 11% - 16% past 4 years
· Constant dividend of 0.5 cents per share, with a 14-26% payout ratio past 4 years
Now I am a little interested.
The company seems to have clear growth strategy in the form of gaining market share in existing market, and entering new markets.
Vietnam, Myanmar and Bangladesh accounted for 26% of the total revenue last year. Think about the potential of Myanmar market.
It has also not forgotten about overall corporate risk assessment and strategic development for long term growth.
Looking at management remuneration. The chairman/MD Ho Leng Hoon salary is 700k with 37% coming from bonus; his wife Lau Woon Chan, Exec Director: 300k with 50% from bonus; their son Ho Chee Hon, the deputy CEO: 400k with 26% from bonus. Seem reasonable for a company with 64m of sales and satisfactory results over years.
The shareholding structure below. Self explainatory.
I think I have found a good company that is reasonably priced. It is cheap from a NAV standpoint. However what draws me is the consistent results and the potential for reasonable growth shown by management’s concrete action in opening up markets to achieve higher sales. Furthermore, selling and fabricating lubricating oil is not a complex business and should not be difficult to execute given the management’s long experience in this line, leaving aside the competitive nature of the industry and geographical risk in overseas market.
Hence I have taken a small position in this counter and will monitor it closely moving forward. I hope it can turn out to be another Tai Sin and Riverstone in my portfolio.
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