SGX stocks on ice and fire with energy crisis

Lifetime Membership As the saying goes, one man’s poison is another man’s meat. While the energy crisis in China threatens to derail the country’s economic growth, it has inadvertently led to an increased in demand for oil. As a matter of fact, crude oil price is currently trading at a 3-year high of US$81.33 per barrel. Against this backdrop, what is the implication for SGX stocks?

For SGX stocks in the oil and gas sector, the current oil price boom is like a cup of hot chocolate amid the fierce winter. The last time that oil price was so buoyant was in October 2014. That was seven years ago. Since then, the emergence of US shale oil and supply glut from Organization of Petroleum Producing Countries (OPEC) caused oil price to plunge by a devastating 70%. The lowest point for crude oil price had to be April 2020. That was the peak of the pandemic which saw demand for oil vaporized due to the global lockdowns.

Looking back, the meltdown of crude oil price and the fallout from the pandemic had been a turning point for many SGX stocks in the oil and gas sector. Big boys like Keppel Corp and Sembcorp Marine had signed a non-binding MOU in June 2021 to merge their oil-rig building businesses. The former has also announced plans to exit the oil-rig building business altogether. On the other hand, there are SGX stocks who sank into the abyss. An example would be oil exploration company, KrisEnergy, which submitted wind-up petition in June 2021.

The oil industry is highly cyclical. This means that we should be at the early stage of an oil boom. This is especially so given that major economies are just starting to reopen their borders in a frantic bid to revive their economies. Many SGX stocks linked to oil exploration activities stand to benefit from this oil boom. In this article, I will share my insights on the outlook of the following SGX stocks.

CSE Global (SGX: 544)

A rising tide lifts a thousand boats. However, this adage didn’t seem to apply to CSE Global share price. Being a technology company that operates in the oil and gas sector, the rising crude oil prices didn’t seem to give much lift to CSE Global share price. Year-to-date, CSE Global share price has only risen by 6.25% while crude oil price has surged by a staggering 71%. Why is this so?

The last time that I covered CSE Global was in November 2016. Back then, the Group was struggling to deal with the impact from the oil slump and had to cull its global workforce as part of a slew of cost cutting measures.

CSE Global operates in three business segments: automation, environmental and telecommunications. Its main clients are from the oil and gas and the petrochemical companies. CSE Global used to be the electronics arm of Singapore Technologies (ST) but after a successful management buy-out in 1997, the company was listed in the Singapore Exchange in 1999. Following a string of acquisitions made over the last two decades, CSE Global has evolved into a technology giant with 42 offices across the world and generates more than 92% of its revenues outside Singapore market.

The entry of Temasek Holdings as the largest shareholder in July 2020 had provided plenty of hype in this counter. Then the release of a stellar full-year financial result in February 2021, followed by a series of shares buybacks, pushed CSE Global share price to a high of $0.57. Nonetheless, the wheels came off the wagon as the Group announced its Energy sector bagging three consecutive quarters of declining new orders. The Energy sector is the largest revenue contributor of CSE Global. Hence the declining contract wins for this sector caused the stock to be bearish.

Given that oil price is now trading at a three-year high, the management’s argument that its subpar performance is attributed to uncertainties in the energy prices is not justified. For this reason, I expect the share price to continue dropping unless the Group is able to reverse its declining contract wins for its Energy sector.

TTJ (SGX: K1Q)

TTJ is one of the biggest winners in the SGX mainboard. Apparently, the surge in its share price coincided with the oil price boom. Year-to-date, TTJ share price rocketed 43%, making it one of the best performers in SGX. The bullish stock performance should be attributed to the financial result. In the full-year financial result released in September 2021, the Group managed to achieve a turnaround, reversing from a net loss of $11.3 million recorded in previous year.

TTJ is one of the largest structural steel fabricators based in Singapore. TTJ’s structural steel solutions are used in a wide array of industries ranging from commercial building construction and offshore oil and gas to industrial plants as well as in various local landmarks. Even though TTJ has exposure to the offshore oil and gas sector, it is unknown if the recent turnaround is linked to the oil price boom because the Group does not break down its revenue source in sectors.

Full-year net profit amounted to $3.4 million and the order book was at a healthy level of $119 million. The improved result should be due to the recovery in the construction sector instead of the overall oil and gas sector. Nevertheless, this sector continues to face pressure from the labour shortages caused by border restrictions. Balance sheet is strong with current assets amounting $106 million while current liabilities amounted to $20 million. Net cash from operating activities was at a healthy level of $6.2 million.

Going forward, I expect TTJ share price to be trading at range of $0.20 to $0.22 (P/E of 20 to 22). Will I invest in this counter? To be honest, nowadays I don’t invest in penny stocks. TTJ is a very small cap stock with market capitalization of just $70 million. In addition, the Chairman Teo Hock Chwee holds 84% stake in TTJ. Therefore, liquidity is a big issue for this stock.

PEC (SGX: IX2)

PEC is another SGX stock that had ridden on the rising wave of the oil price boom. Year-to-date, PEC share price surged 46%! PEC is an engineering specialist servicing the oil and gas companies in the area of EPC (Engineering, Procurement and Construction) and maintenance activities. Like TTJ, PEC achieved a turnaround by recording a full-year net profit of $23.5 million versus losses of $13 million in FY2020.

One of the things I like about PEC is that it is trading at P/E of just 6.35 and P/B of 0.645. This means that this counter is trading at levels below its book value. Just like TTJ, PEC is also a small cap, with market capitalization of just $150 million. However, unlike TTJ, the shareholding of PEC is not concentrated to one single shareholder.

Balance sheet was healthy – current assets amounted to $291 million while current liabilities stood at $147 million. Cash flow from operating activities stood at $55 million. Management has indicated that the level of project enquiries had started to pick up in recent months. Hence, they are “cautiously optimistic of the outlook of new projects and maintenance works” in the key markets, particularly in Singapore, Vietnam and the Middle East. In view of this, I forecast that PEC share price may be trading at range between $0.60 to $0.65 in FY2022.

Sembcorp Marine (SGX: S51)

Do I need to elaborate further on this counter? Sembcorp Marine has to be one of the worst performing SGX stocks in 2020 and 2021. The Group broke the heart of many investors by raising two billion dollars rights issues in as many years, causing the share price to rupture. The latest rights issue triggered the mandatory general offer in accordance with Rule 14 of the Singapore Code on Takeovers and Mergers.

The next baptism of fire for Sembcorp Marine share price (SGX: S51) should be the upcoming proposed merger with Keppel Offshore and Marine (KOM). As part of the deal, Sembcorp Marine and KOM will combine to form a new listed entity. The newly listed stock would provide an opportunity to “reset” the ailing Sembcorp Marine share price (SGX: S51). Nonetheless, a lot would depend on the valuation by the investment bank working on the merger. And then there is no guarantee that the merger will even take place as the MoU is not binding.

The latest profit guidance will surely give investors more sleepless nights. The management revealed that there would be further delays for five of its 16 projects due to labour shortages and delayed in equipment delivery. The delays will “result in significant losses for 2H2021, which could potentially be in the range of the losses reported for 1H2021”. Thus. The full-year loss for Sembcorp Marine could be anywhere between $1.2 billion to $1.4 billion.

The latest announcement is yet another knock-out blow to investors. I am not sure whether the project delays could cause another bout of liquidity crunch for Sembcorp Marine. If so, then another round of rights issue in 2022 could be on the way. Given the chaos in Sembcorp Marine, I am not optimistic of the share price performance in FY2022. This counter is highly risky and I would avoid investing in it even though there is catalyst arising from potential merger with KOM.

Conclusion

Investing in SGX stocks is not easy at all. There are those who invested in the big cap stocks but end up losing monies (e.g. Sembcorp Marine) and then there are those who made big money from penny stocks (e.g. PEC). At the end of the day, investors must really monitor their portfolio closely. You don’t want to be the last man standing when the counter blew up in pieces. On the other hand, it may be good to cash out when the share price meets your target exit level.

I hope this article has managed to reach out to you and convince you the merits of signing up SG Wealth Membership. Don’t procrastinate anymore my friend. This is about building long-term relationship and I certainly look forward to you coming on board. Together, we can forge a better tomorrow.

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