May 14, 2019

GSS Energy’s 1Q19 loss of SGD0.2m stemmed from price competition and cost-down pressures shrinking margins, as well as higher depreciation costs from new machines. We expect margins to improve, but remain weaker than last year’s. Monetisation of gas wells will likely also be delayed. As such, we cut FY19F/20F PATMI by 45%/35%, which leads to a lower TP.

While revenue was maintained, margins narrowed to 16.1% in 1Q from 23.3% in 1Q18, mainly due to stiffer price competition, cost-down pressures from customers as well as changes in its product mix. Going forward, margins should improve in subsequent quarters – albeit still lower than that of FY18.

GSS Energy’s oil & gas business suffered from many setbacks and delays throughout the year. It is at an advanced stage of obtaining regulatory approvals to monetise the two proven wells – but could see further delays due to the uncertain timeline of getting the green light from the authorities. Until that happens, this segment will likely continue dragging on earnings. A silver lining, however, could come from management exploring the option of farming out part of the oil field – which will enable it to get a lump sum cash injection and also peg a value to its oil & gas assets (which are currently not reflected in its market cap valuation).

With 1Q19 margins significantly below our estimate, coupled with a tepid macro-economic outlook, we expect FY19 to be a tough year for GSS. Overall, margins should be weaker YoY, while there could be further delays from the oil & gas segment. As such, we slash FY19- 20F PATMI by 45%/35%, which leads to a lower DCF-based TP of SGD0.08. Downgrade to NEUTRAL. – RHB

GSS Energy closed at: S$0.082