March 13, 2018

GSS Energy (GSS) has adopted a dividend policy of at least 20% of PATMI for FY18F-19F. We believe that management is keen to reward shareholders by implementing this policy. This is also a positive sign and strong vote of confidence from management in its outlook, as its precision engineering (PE) business is enjoying healthy growth while it may potentially start selling oil in 1H18. We expect 20% of PATMI to be equivalent to a potential dividend yield of 1.9% for 2018, before it gradually increases to 2.4% in 2019F.

Management revealed that demand from its existing customers like Phillips and Lego has stayed strong, with orders growing 20% YoY this quarter. GSS has also been engaged in ongoing testing with a new customer in the consumer space, and expects to start full-scale production by 1H18 (this could boost the PE division’s topline by 15-20% in FY18). However, we understand that it would eke a narrower margin from making the respective product. All in all, we expect the outlook for its PE arm remain positive in FY18.

We understand that it is very hard to qualify as a manufacturer for Lego. In fact, GSS is one in a small handful of companies that manufacture for Lego – especially in Singapore. This is a testament to the technical capability and quality of its PE arm. We expect margins to also be better than that of its usual orders.

On 13 Dec 2017, GSS made a hydrocarbon discovery in its Trembul Operating Area. Management has stated that it expects production of gas to commence in 4Q18. GSS is re-entering a makeover well and we expect it to start producing 200 bbls of oil a day by 1H18 – and to enjoy better margins and profitability if oil prices continue to increase.

With a positive outlook ahead, we think GSS is currently at an inflection point. At its current share price level, the stock is significantly undervalued. It also provides a unique opportunity for investors to ride on the manufacturing boom and oil price recovery. As a result, we maintain our BUY call, with an unchanged SOP-based TP of S$0.25 by RHB. Share price closed at S$0.174