Nothing in this post is intended to be financial advice and should not be taken as such, please do your own research before investing.
Note (1 April 2024): I will not be updating this post. Please continue to follow my YouTube channel (Possibilities Unbox) for updates. Dyna-Mac and Marco Polo Marine remains good. However, Acesian Partners has been disappointing. Its financial performance is not consistent.
Characteristics of these hidden gems:
- Smaller market cap companies (< S$500m) with reasonable daily volume
I would be more cautious of those with less than S$100m market cap and share prices less than S$0.10. They can be more prone to speculation and manipulation. Portfolio allocation becomes an important defence. - Some or no coverage from analysts
- Relatively unheard of
- Owner-operator preferred
- Growth in revenue and earnings *
- Improving margins preferred *
- Improving or high Return on Equity *
- Room for price-to-earnings to increase *
- In net cash preferred
* Growth + Low multiple + High ROE can propel the stock higher easier and faster.
The investing criteria is a reference to the book, 100 Baggers: Stocks That Return 100-to-1 and How To Find Them by Christopher Mayer and the post: Multi-baggers with growth companies.
They need to be tracked and validated more closely (not buy and forget) to ascertain their quality; they are not proven yet and the sector they are operating in can be cyclical. There is no guarantee that these companies will continue to do well in the longer term.
1. Dyna-Mac
Their business
Offshore topside module and structures
- Engineering, procurement and construction of topside modules for FPSOs (floating, production, storage and offloading vessels), FSOs (floating, storage, and offloading vessels), FLNG (floating liquefied natural gas vessels) and FSRU (floating storage and regasification units)
- Engineering, procurement and construction of topside facilities for the Central Processing Platforms (CPP) and Wellhead Platforms (WHP).
Special offshore projects
Examples:
- Hull of semi-submersible floating production unit (FPU)
- Turret Mooring Systems
- Subsea Pipeline (Gravity Actuate Piping Systems)
Investing thesis
A. New CEO
The CEO (Lim Ah Cheng) started work on 1 March 2020, when Covid-19 was beginning to spread to the world and many countries implemented various measures and restrictions. He took over from its founder (Desmond Lim) who died of cardiac failure on October 2019.
The yard was shut, there were no workers, oil prices were down drastically, and some of our projects were even making losses then. We didn’t have enough work at the time as well.
Lim Ah Cheng, Executive Chairman and CEO, in an interview with The Edge Singapore
Despite the untimely start, since his reins as the CEO, the book order and financial performance have improved.
B. Improving financial performance
They are growing very well with their revenue and profits and better free cash flows and improving their cash position. It is in a much stronger financial position now than in 2012 to 2014 when their revenue was improving with the deteriorating cash position. Return on Equity (ROE) for 2021 and 2022 were above 15%. I suppose the company is more cautious this time. I believe that profit margins are still low and have room to improve.
They declared dividends in 2023 for the first time since 2015 albeit with a low yield.
C. Strong order book
They are securing more contracts; resulting in a record net order book.
By May 2023, they have already secured S$270m worth of contracts matching that of 2022 and pushed the net order book to S$608.1m stretching to 2025.
They are operating close to full utilisation and they need to lease additional land near their current facilities to increase their capacity by 30% to 40%. This will grow their revenue further. They are able to expand with their existing cash position.
D. Getting noticed
With a market cap of S$394m, analysts are beginning to cover the company. There is also media coverage of the company and the CEO.
Risks
The company’s financial performance is dependent on the continued upcycle of the oil and gas industry.
What I will be monitoring
- Continued growth with more contract secured and yard capacity expansion
- Improving margins through better productivity
- Increased valuation with a high price-to-earnings ratio as the company continues to grow and investors become more confident of their longer-term prospect
Update (August 2023)
It continued to do well as shown in its Q3 2023 earnings. It is moving in the right direction with its cautious allocation to capital allocation and diversification to new opportunities with its partner.
- It signed an MOU to execute projects in Kim Heng’s shipyards. This gives Dyna-Mac greater flexibility to address spikes in demand instead of incurring capital costs to expand its yard.
- It signed another MOU to pursue Carbon Capture and Storage projects with BW Offshore.
The management is pursuing a JTC lease for a piece of land in Singapore for which it was granted a temporary occupation licence for the purpose of soil investigation. This corresponds with the robust FPSO demand in the medium term. The new piece of land will provide additional fabrication capacity for current and future projects such as carbon capture and storage, and exotic piping for hydrogen/ammonia. The analysts expect yard capacity to grow by 30-40% by the end of 2023.
2. Marco Polo Marine
Their business
- Ship chartering operations: Tugs and barges, OSVs (Offshore Support Vessels)
- Shipbuilding, ship repairs and conversions
- Renewable/offshore fabrication
Investing thesis
A. Rising from ashes
The company was hit badly by the previous boom and bust of the oil cycle. The deteriorating revenue was exacerbated by negative free cash flow and worsening debt position which threatened its survival. In 2017, it did a loan/debt restructuring and refinancing. Concurrently, the company approached more than hundreds of potential investors to secure S$60m fresh funding in cash to boost its working capital from 9 investors. The exercise substantially diluted the controlling interest of the founder (62% as per 2017 Annual Report to 10% as per 2018 AR) and handed the controlling interest over to 1 of the strategic investors (i.e. Apricot Capital: 17% as per 2018 AR) in order to keep the company afloat and preserve value for the stakeholders. The founder continued to be the Executive Chairman before retiring in January 2020, while his son (Sean Lee) continued to be the CEO.
Since then, it has made a remarkable turnaround with growing revenue and profit which improved its financial position significantly. Return on Equity (ROE) for 2021 and 2022 were improving.
I believe the company has learnt the painful lesson well and knows very well that it cannot fail again. The company will be cautious. It has not declared dividends since 2013.
Bad companies are destroyed by crisis, Good companies survive them, Great companies are improved by them.
Andy Grove
Through the boom and bust cycle of the oil price where the latter dropped in 2014, a few Singapore-listed Oil & Gas companies have failed, and many have shrunk, still struggling and restructuring. Dyna-Mac and Marco Polo Marine are two companies that manage to survive and improve compared to many O&G listed in SGX.
B. Getting noticed
Despite having a small market cap of S$210m and a share price of S$0.056, analysts are beginning to cover the company.
Risks
The company’s financial performance is dependent on the continued upcycle of the oil and gas industry.
What I will be monitoring
- Continued revenue growth and improved margins
- Increased valuation with a better price-to-earnings ratio as the company continues to grow and investors become confident of their longer-term prospect
Update (August 2023)
It continued to do well as shown in its Q3 2023 earnings. It has come a long way from hitting its revenue peak in 2014 at S$113m, crashed to a low of S$26m in 2018 and is now on its way to achieving a new revenue high in FY2023. What a comeback! It shows the resiliency of the company.
3. Acesian Partners
Their business
- Critical airflow design and supply: Its manufacturing capability encompasses Ethylene Tetrafluoroethylene (“ETFE”) coated stainless steel ducts, uncoated stainless steel ducts, galvanised ducts and other specialised exhaust system components. Its competitive advantage is its FM-approved status (an international commercial and industrial property insurance and risk management organisation) for the production of ETFE-coated ducts.
- Information Communication Technologies: It provides a complete range of services (including design and build audio-visual solutions, system integration and managed services) to our contractors, consultants and customers, including but not limited to the commercial, financial and education sectors.
Investing thesis
A. Strong growth from its critical airflow design and supply business segment
Acesian Partners has been quite a mediocre company. Its revenue hit a low in 2020 but went on strong revenue growth in 2021; increasing by 55% and a further 157% increase in 2022.
The critical airflow design and supply business segment is the reason for its growth. It accounts for 98.32% of total revenue in 2022; from 65.71% in 2020.
Gross and net profit margins together with its free cash flow and cash position have also been improving significantly.
B. Undiscovered gem
It is not covered by analysts. It only has a market cap of S$26.42m. At the current share price of S$0.053, it is trading at a price-to-earnings of just 3.11 of its 2022 earnings.
C. Share buybacks
Despite being listed since 2005, it was only in November 2022 that it did its first share buyback. Since then, it reduced its total share count by 4.3%; spending almost S$1m. Is this a sign of confidence?
Risks
It is dependent on growth in its critical airflow design and supply business segment.
What I will be monitoring
- Continued growth in their critical airflow design and supply business segment.
They experienced tremendous growth from their critical airflow design and supply business segment only from H1 2021 onwards. It will need time to prove itself and ascertain its growth sustainability — whether the growth is more of the business recovery from COVID-19, growth in business activities and/or improvement in its capabilities. - If its growth is sustainable, we are early now. Its share price will benefit from sales and margin growth as well as improved valuation as investors assign a higher price-to-earnings ratio.
Update (August 2023)
The H1 2023 earnings were disappointing with the sharp drop in revenue. The business is more lumpy than expected. However, gross and net margins improved. The share price has also dropped to an attractive level. We need to continue to validate whether the company will continue to grow over the long term.
