5AU:SES- AP Oil International Ltd

[pabraifan]

AP Oil International is a Singaporean company with three segments related to petroleum lubricating oil: manufacturing segment, trading segment and franchising segment.

The manufacturing segment manufactures various lubricants, oil and specialty chemicals for industrials, automotive and marine industries. The trading segment trades oil and additives while its franchising segment trades raw material under company brand name. 

 

The company incurred its first and only loss in 2005 related to trading segment related to contract settlement after supplier fail to honor its contract. After that, mgmt. increased its manufacturing segment income which has the highest margin by increasing its manufacturing sales as its EBIT margin increased from 3.9% in 2005 to 6.9% in 2013. EBIT margin peaked at 10.2% in 2009, but average slightly above 6% in following four years.

 

Despite only one year loss in its 38 years history, it has stable/consistent EBIT margin, no debt, lots of cash and insider owning 47%, AP Oil International is selling at low valuation: 

EV/2013EBIT=1.4,

P/E 7.7,

P/E(ex-cash)=2 and

P/TB=0.87.

 

This company ROTB  has consistently been above teens and achieved 13% ROTB in 2013 after sales declined by 28%.  Its current market Cap with stock price of SG$0.215 is SG$35.4 mil, but it cash and "investment in assoc" accounts for SG$26.2 mil and SG$2.7 mil, respectively. I think the value of "investment in assoc" at SG$2,733 on balance sheet is undervalued because it produced SG$653 income in 2013 implying P/E of 4.

 

The main risks are:

-slowing Chinese economy affecting all Asian economies.

-Concentration risk on sales as top 2 customers account for 40% total sales

 

See attached pdf for financial numbers

AP_Oil_Financial_Analysis.pdf

[LC]

Backing out cash the company trades for like 1.5x earnings?  :o

[pabraifan]

Backing out cash the company trades for like 1.5x earnings?  :o

 

I have P/E (ex cash)=2 .See pdf attached.

[Myth465]

Why arent they buying back stock or paying a higher dividend. Whats the catalyst...

[writser]

There are no catalysts and capital allocation obviously isn't top notch - otherwise these opportunities wouldn't exist in the first place. That said, the question is whether you need a catalyst if a company is trading at these levels and management is not actively trying to screw you over. There are a lot of similar opportunities in Singapore: PNE industries, Jason Marine, Lantrovision, Nam Lee Pressed Metals, Zagro Asia and Spindex Industries come to mind. Similar opportunities exist in Hong Kong, for example check this interesting thread about Asia Standard: link.

 

These investments are probably not Gio's cup of tea ( :) ), but they are so cheap that I couldn't resist initiating a few small positions. I think a basket approach could work out here. A couple of companies are trading at a decent discount to NCAV, have been profitable for years, are growing, have not issued shares and management compensation is not excessive. Something like AP Oil actually has a decent return on capital, a 5% dividend yield and revenue is growing 10% anually. Your downside is protected at current prices and there is some nice upside if things turn out ok. For example, PNE industries rose almost 50% after an announced dividend hike.

 

Finally, Singapore is not a city where I would try to run a fraud or scam shareholders. Not so sure about Hong Kong.

[yadayada]

what are take over laws like in Singapore? Can they try to hustle out shareholders with a 60% stake or something?

 

I think the reason why asia standard is cheap is because of organized crime. one of the head honcho's there is some kind of macau crime lord. Obviously not someone you want to be in with. some of that cash flow might be money laundering.

[NeverLoseMoney]

I have a small position in AP Oil. I agree fully with writser's post: investing in a basket of these stocks should work out well.

That said, the chairman & CEO of AP Oil was fined for making a misleading statement to the Singapore Exchange in 2009: http://thecourtroom.stomp.com.sg/courtroom/cases/2-directors-of-oil-company-fined-330k

That might be one reason why the stock is so cheap.

 

Of course this looks really bad. From what I understand the CEO had serious doubts about some large contracts with a Chinese company actually materializing and he decided not to disclose these contracts to the exchange and investors before receiving letters of credit. That was wrong and he was fined for it.  A director also bought AP Oil shares in this period and he received a fine for insider trading. It involved 85,000 shares or about S$26,000.

 

All in all, I don't think this is a fraudulent company. These persons did make a serious mistake and were punished for it.

[pabraifan]

I like to thank everyone for their input.

 

Since someone mentioned higher dividend or buy back shares, would mgmt. wiling to increase dividend/buy back shares if small investors request it? How investor friendly is Corporate Singapore in general?

Anyone have any experience willing to share?

 

Thanks again 

[moustachio]

Finally, Singapore is not a city where I would try to run a fraud or scam shareholders. Not so sure about Hong Kong.

 

There have actually been a lot of Chinese companies that listed on Singapore exchanges and were frauds. It looks like this company is actually Singapore based, but there are definitely frauds on the Singapore exchanges.

[writser]

There are no catalysts and capital allocation obviously isn't top notch - otherwise these opportunities wouldn't exist in the first place. That said, the question is whether you need a catalyst if a company is trading at these levels and management is not actively trying to screw you over. There are a lot of similar opportunities in Singapore: PNE industries, Jason Marine, Lantrovision, Nam Lee Pressed Metals, Zagro Asia and Spindex Industries come to mind. Similar opportunities exist in Hong Kong, for example check this interesting thread about Asia Standard: link.

 

Two months later:

 

PNE Industries: +70%

Jason Marine: +50%

Lantrovision: +20%

Spindex: +8%

 

Unfortunately I only initiated a small position in PNE industries. Nam Lee still looks interesting. Actually, the others still look interesting too but to be fair I haven't put that much effort into them.

 

With regards to the above: you are completely correct. I try to avoid anything that potentially could be a Chinese fraud. The mentioned companies all conduct business in Singapore. I might lose out on some opportunities because of that but I really think it isn't worth all the frustration and potential losses.

[The Value Edge]

There are no catalysts and capital allocation obviously isn't top notch - otherwise these opportunities wouldn't exist in the first place. That said, the question is whether you need a catalyst if a company is trading at these levels and management is not actively trying to screw you over. There are a lot of similar opportunities in Singapore: PNE industries, Jason Marine, Lantrovision, Nam Lee Pressed Metals, Zagro Asia and Spindex Industries come to mind. Similar opportunities exist in Hong Kong, for example check this interesting thread about Asia Standard: link.

 

Personally, I feel that with such undervalued stocks, you dont really need a catalyst. Like what Graham said to Senator Fulbright, such stocks naturally revert back to normalised levels. Furthermore the reasons are a mystery. They just naturally do. Like the forummer who commented above me, the stocks he mentioned are some of the few net net stocks where something like this happened. Look at other companies like Jason Marine, Koyo, Fu Yu, it all falls within the similar scenario.

 

Cheers!