AP Oil

AP Oil's (APO) profit and share price has taken a beating over the past two years. Yet, this is also one of the few companies where net cash equal market cap, business continues to be profitable and cash flow generative, and dividends continue to be paid. Is there an opportunity at present price?
 

1.      Abstract
 
Publicly available information since APO’s listing shows that the company has kept its focus on trying to perform two things well. The first is growing its core business of blending and selling lubricants. The second is to invest the accumulated profits from the core business, into profitable businesses, at opportune moments. The results of its efforts in these two aspects has been largely positive, which resulted in its book value growing from $10m since IPO to $56m presently. However, in the course of growing the company’s book value, most of its earnings were retained and very low dividends were paid, especially during the first decade after its IPO. As the company undergoes leadership succession amidst intense competition in the local lubricant market, a sizeable capital expenditure to upgrade and increase the capacity of its plant and jetty at Pioneer Road is being undertaken. Meanwhile, a massive amount of net cash still sits on its balance sheet. 


2.      The Business: Largely Stable
 
Since 2010, historical data on profitability demonstrates that APO to be rather well-managed. Apart from the poor results from recent years – which was due to more intense competition resulting in margin compression – APO generated a rather high ROA of about 10%.
 
                             NP                        GPM                    ROA
FY10:                   4,722                   19.09%               13.32%
FY11:                   4,164                   19.27%                10.24%
FY12:                   5,762                   16.47%                13.28%
FY13:                   4,563                   20.67%                9.02%
FY14:                   4,995                   17.47%                9.03%
FY15:                   4,221                   15.85%                6.72%
FY16:                   3,495                   16.48%                5.38%
FY17:                   2,422                   12.09%                3.88%
FY18:                   2,006                   12.57%                3.07%
                            
APO thrives on being a low margin and high volume business. Inventory turnover has been less than 2 months, and more recently, less than 1 month. Receivable turnover has also been consistent at less than 2 months. As payable turnover also do not exceed 2 months, this means APO only requires enough cash for 2 months of orders, at any one time, if it doesn’t increase its orders. These make APO rather light in working capital requirements.

And since the value of APO’s products – mainly lubricants for marine and automotive engines – lie in its blending formula, there is no need to change machinery (e.g. mixing tanks, filling lines) to produce a product of different specification. This is unlike most other forms of mechanical manufacturing, where an upgrade of machinery may be required to produce products of different/better specification. APO thus enjoyed low capital expenditure requirements; some repairs from year to year, but nothing major.

The low working capital and capital expenditure requirements means that APO does not require much cash to finance its operations. Indeed, APO is able to produce positive free cash flow on most years (the large negative FCF in FY17 was due to its $5.1m investment, with MoneyMax, into a financial leasing business in Chongqing), and has been consistent in maintaining a very low liabilities to asset ratio. 
                                          
                        FCF ($,000)         Rec. Turnover      Inv. Turnover             LTA Ratio
FY10:                   -136                     1.18                     1.57                     17.57%                                           
FY11:                   3,731                   1.88                     1.47                     19.70%
FY12:                   5,632                   1.17                     1.01                     15.75%
FY13:                   6,310                   1.52                     1.80                     19.04%
FY14:                   5,163                   1.25                     1.12                     16.18%
FY15:                   2,553                   2.22                     1.16                     17.32%
FY16:                   7,431                   1.43                     1.33                     15.01%
FY17:                   -3,782                  1.41                     0.74                     14.48%
FY18:                   1,877                   1.50                     0.78                     15.48%
 
The low receivable turnover, with the absence of any major bad debt impairment, also means that APO has been correct on its selection of credit-worthy customers. Or that it had very strict credit policies. Aegean Marine Petroleum – which was APO’s largest customer for FY17 – where Aegean contributed more than 10% of APO’s $91m revenue – filed for bankruptcy last year. APO’s net claims against Aegean is only US$160k.
So good was APO in generating and hoarding cash that its cash balance swelled over the years to a level that nearly equal its market value. Since APO does not need most of this cash to fund working capital and growth in capital expenditure – as previously discussed – it could actually return most of it, if the BOD wanted to. Assuming this cash balance is removed, and replaced with a more reasonable sum of $5m for working capital, the business is revealed to be generating very high ROA, albeit lower in recent years.                                                                                               
 
                         Total Assets            Cash               Less Cash plus $5m              Adjusted ROA
FY10:                   35,462                 13,091                 27,371                               17.25%                             
FY11:                   40,659                 16,039                 29,620                               14.06%
FY12:                   43,399                 20,443                 27,956                               20.61%
FY13:                   50,585                 26,211                 29,374                               15.53%
FY14:                   55,289                 31,303                 28,986                               17.23%
FY15:                   62,768                 31,215                 36,553                               11.55%
FY16:                   65,021                 38,278                 31,743                               11.01%
FY17:                   62,393                 32,033                 35,360                               6.85%
FY18:                   65,270                 34,535                 35,735                               5.61%


3.      Electrification of Vehicles in SEA: Unlikely
 
However well APO performed in the past does not mitigate its poor performance in the present. Few details are revealed in its public filing discussions, save for ‘competition in marine lubricants’ for FY18 and FY17, and ‘sluggish business conditions’ for FY16. Will APO’s earnings be able to recover?

The largest threat to APO’s business is disruption from new vehicle technology. As vehicles are more likely than ships to transition from being powered by internal-combustion engine (ICE) to batteries in the near future, it makes sense for lubricant manufacturers to pivot from selling to vehicle-end-users, to ship-end-users. Competition in the marine lubricant market has been cited by APO as the reason for falling profits in the past two years.

As it is perceived that the total market for lubricants will gradually shrink due to decrease in vehicle-end-users, the competition between lubricant manufacturers – and there are plenty of them in Singapore – naturally become more intense.

https://www.mckinsey.com/industries/oil-...c-vehicles
 
However, it does not seem likely that ICE vehicles will be quickly replaced in the region, as electric vehicles (EVs) ownership remains a tiny fraction of overall vehicle population. In the major South East Asian (SEA) cities – Bangkok, Kuala Lumpur, Jakarta, and Manila – it is still difficult to spot EVs on the road.  Although some steps have been taken by the governments to promote the use of EVs, such as in setting EV adoption targets, it seems that most are more interested in attracting EV manufacturers to set up plants in their countries – where jobs are created and taxes levied – than actually ‘electrifying’ their country’s vehicle population, which will result in higher government expenditure. Furthermore, the higher cost of EVs put them out of reach of the regular South East Asian; the richer of whom has only recently been able to afford ICE vehicles.

https://www.malaymail.com/news/malaysia/...ns/1665532

http://www.nationmultimedia.com/detail/b...d/30354977

https://www.straitstimes.com/asia/se-asi...-ambitions

https://www.topgear.com.ph/columns/head-...0-20181012
 
Between raising the income of populace, and spending on encouraging the use of a technology which is far too expensive for most, it is clear that EV adoption will not be high on the priorities of SEA governments. For now at least. Nissan, in its quest to promote its latest EV model (Leaf) acknowledged the situation:

Despite the virtues of EVs, and outlook of a long-term upward trend, the so-called “electrification” of the region has been slow to take off. Penetration remains minuscule.

For EV adoption to make considerable progress and spur demand, governments in South East Asia needs to play a more crucial role in providing incentive, adopting standards, aligning taxation norms, and most importantly, facilitating the set-up of charging infrastructure.

https://newsroom.nissan-global.com/relea...32083d9d3a


4.      Market for Marine Lubricants: Likely to Expand

If it is unlikely that ICE vehicles will be replaced by EVs in SEA, then it may mean that the competition in the marine lubricant market is likely to ease, eventually. Perhaps in anticipation of better market conditions, APO is expanding its production capacity.

On June 2018, APO announced that it has awarded an $8.7m contract to build a new office at its 18 Pioneer plant. In addition to the office, it will also be purchasing machinery (i.e. tank and piping) and performing civil works (i.e. jetty construction), where the total bill is expected to be about $10.6m. This capital expenditure has to be done to extend its lease at Pioneer for another 20 years, which is presently expiring in 2024. APO claims that the plant improvements will allow it to increase sales volume. Whether this capital expenditure will generate satisfactory returns is not certain.
The upside to this facilities upgrading project is that the market for marine lubricants in Singapore is likely to be larger in the future. The increase in demand for marine lubricants can come from two sources.

The first is from an increase in shipping activity. Singapore port is a popular stop-over destination for ships travelling between Asia and Europe.Apart from transhipping containers, ships frequently stop-over in Singapore to purchase bunker and supplies, such as marine lubricants. As it is expected that container transhipment will continue to increase – the construction of the Tuas Mega Port being such an anticipation – this means more and bigger ships calling at Singapore, which means a largermarket for sellers of marine lubricants.
 
Number of Vessel Arriving at Singapore Port
                        For Supplies                      Total Arrivals
2008:                  20,199                               131,695
2009:                  20,694                               130,575
2010:                  21,629                               127,299
2011:                  22,685                               127,998
2012:                  24,166                               130,422
2013:                  26,334                               139,417
2014:                  27,340                               134,883
2015:                  29,756                               132,922
2016:                  31,265                               138,998
2017:                  30,946                               145,147
2018:                  28,819                               140,768
 
The second is from an increase in offshore oil & gas activity. The construction, maintenance, and provision of supplies to offshore oil and gas platforms provided a steady source of work for offshore support vessels (OSVs), such as anchor handling tug supply, platform supply and other related vessels. These offshore support vessels in the region operate in the oil and gas blocks off the coast of Thailand, Malaysia, Indonesia, and Philippines. As the number of such vessels grew during the earlier part of this decade, so did the demand for marine lubricants, which is required for the maintenance of these vessels.

But as demand for OSVs waned since the correction of oil prices in 2014, more of them are mothballed, or operating on very thin margins. The eventual return of offshore O&G activity will bring back demand for APO’s marine lubricants, which is sold regionally. Presently, utilisation of OSVs in the region has been reported to be around 50%, with about 400 of them cold stacked.

https://www.osjonline.com/news/view,sout..._56912.htm
 
Yet, APO's effort to increase production capacity will be for naught if the quality of APO’s lubricants are poor and does not provide sufficient value proposition to the customer. After all, the market is dominated by numerous oil majors. So if we are not users of APO’s lubricants, how do we know if they are any good?

The Asian Lubricant Manufacturers Union was launched on March 2018. Dr Ho Leng Woon, Exective Chairman of APO, was named the Council Chairman. For Dr Ho and APO to be chairing the Council, it would not be unreasonable to claim that either possess a somewhat reasonable level of respect and clout in the industry. It would also be remiss if this newly formed organization is chaired by a company whose products are of poor quality or repute. After all, APO does have a history of blending lubricants for oil majors such as Sinopec, Aegean, and more recently, Puma Energy.

https://www.asianlubricantmanufacturers.org/


5.      Capital Allocation Ability: Largely Positive 

Another key aspect of APO’s strategy is to reinvest profits into business acquisition, joint-ventures, or equity stakes without any management role, while the rest – as we have seen – were squirreled into its bank account.

APO’s first acquisition was AIM Chemical, purchased prior to IPO, and then GB Chemicals in 2004. Both were purchased at about 3x P/E, and have made consistent contributions to APO since.

Soon after listing, APO also invested $4m into constructing and operating an 80%-owned lubricant manufacturing plant in Vietnam. But in 2006, this JV was sold, ostensibly to recoup the trading losses incurred in 2005 when its supplier failed to deliver. As APO then failed to deliver to its buyer, it faced large losses due to a breach of contract. In 2008, APO invested $2m for a 30% stake in another for another plant in Vietnam. This plant, AP Saigon Perto JSC, continues to contribute to APO’s bottom line to this day.

In 2009, APO – through GB Chemicals – purchased a 38% stake in Systematic Laundry & Uniform Services for $750k. This was sold in 2014 for $2.3m. In 2015, APO purchased a 60% stake in a local chemical trading company Heptalink for $743k. It seems that trading is not APO’s forte, or maybe it was just bad luck, because Heptalink lost $1.1m that very year it was acquired. In 2018, Heptalink was wound up.

APO’s last investment was made in 2016. APO paid $5.1m for a 12.5% equity stake in a financial leasing business with Chongqing Zongshen Powermachinery and MoneyMax Financial Services. APO holds the option to sell its stake back to Zhongshen, for a sum that is higher of its original capital or an agreed market value. It is likely that APO will sell the stake sometime in the future, when the business has grown (in value).
             
Year      Investment                                                              Outcome
2000:    A.I.M Chemical                                                    Positive, 100% subsidiary
2004:    GB Chemical                                                       Positive, 100% subsidiary
2006:    AP Petrochemical (Vietnam)                                  Positive; 80% JV, sold
2008:    AP Saigon Petro JSC                                            Positive, 30% associate
2009:    Systematic Laundry & Uniform Services                 Positive; 38% associate, sold
2015:    Heptalink                                                           Negative; 60% subsidiary, sold
2016:    Chongqing Zongshen Financial Leasing                 Unknown


6.      Dividends: Increased over the years, but more can still be distributed
 
As it is APO’s strategy to accumulate cash for reinvestment into other various ventures (as mentioned) and growth (such as its recent plant upgrading), the dividends distributed to shareholder inevitably suffer as it stands low on management’s priority. In the first 9 years of APO’s listing, dividend was either low or not distributed.
 
($'000)                Net Profit           Dividends           Payout Ratio
FY01 (IPO):          1,905                   349                      18.3                    
FY02:                   2,392                   303                      12.6
FY03:                   2,388                   787                      32.9
FY04:                   1,440                   211                      14.6
FY05:                   -5,606                  0                           0
FY06:                   6,937                   0                           0
FY07:                   2,809                   0                           0
FY08:                   5,654                   0                           0
FY09:                   2,425                   0                           0
Total:                  20,344                1,650                     8.11
 
In the following 9 years, APO distributed higher dividends consistently, with a slightly higher payout ratio. This is a marked improvement in rewarding shareholders. But it is still rather low, especially when compared to other dividend-paying companies.
 
($'000)                Net Profit           Dividends           Payout Ratio
FY10:                   4,722                   1234                    26.3
FY11:                   4,164                   823                      19.7
FY12:                   5,762                   823                      14.2
FY13:                   4,563                   823                      18.0
FY14:                   4,995                   823                      16.4
FY15:                   4,221                   823                      19.5
FY16:                   3,495                   823                      23.5
FY17:                   2,422                   1234                    50.9
FY18:                   2,006                   823                      41.0
Total:                  36,350                 8,229                    22.6
 
In more recent years, the dividend payout ratio has actually been increasing, but that is because the amount of dividends remained the same while NP has been falling.  So another way of looking at this is that perhaps APO shareholders should be glad that the low base dividends meant that it need not be cut during times of falling profits. After all, the falling profits would have given the BOD the perfect reason to reduce/stop dividends – since it was only a fraction compared to their KMC, and hence would not greatly impact their overall income – but they did not.

Nevertheless, comparing the past 9 years' total profits and total dividends, there is no doubt that APO could have been a little more generous with rewarding shareholders. Assuming that APO needs to spend another $8m on its plant upgrading project – FY18 cash flow statement showed it spent $3m on PPE – APO will still have a cash balance of $25m, even if it does not generate any additional operating cash flow for FY19. Given APO's low working capital requirement – as described earlier – and its presently ongoing $10m plant upgrading project, it should have no short and long term need for most of this remaining $25m. It should therefore have no problem paying out at least half of it.


7.      Key Management Compensation: Fair and Comparable
 
The table below shows Key Management Compensation (KMC) over the past 9 years. It should strike observers that APO has been very consistent with the absolute amount it pays management; $2m every year regardless of gross profit level. On most of the better years, KMC is almost half of Net Profit (NP). On bad years like FY17, KMC is almost as much as NP. Overall, more of the Gross Profit (GP) is being consumed by KMC; from 14.% in FY10 to 18.9% in FY17. Is APO's management fairly remunerated?
 
($'000)                 KMC                    GP                   KMC as % of GP                            
FY10:                   2,050                  14,125                 14.51%                             
FY11:                   2,050                  12,779                 16.04%
FY12:                   2,147                  14,834                 14.47%
FY13:                   2,107                  13,324                 15.81%
FY14:                   2,102                  13,699                 15.34%
FY15:                   2,148                  13,580                 15.82%
FY16:                   2,192                  13,042                 16.81%
FY17:                   2,107                   11,117                 18.95%
FY18:                   n.a.                      9,852                   n.a.
 
But when compared to other listed companies of similar size and industry – United Global and Chemical Industries (Far East) – APO's management remuneration does not seem to be an anomaly. United Global's KMC to GP ratio has been trending lower, but it should also be noted that they paid themselves a handsome US$21m dividend prior to IPO (which is almost triple of what they raised from the IPO). For Chemical Industries, its KMC to GP ratio is much higher compared to the two other companies.
 
KMC to GP Ratio
(%)                      APO               United Global        Chemical Industries
FY10:                   14.5                     n.a.                      18.7
FY11:                   16.0                     n.a.                      24.7
FY12:                   14.4                     n.a.                      24.9
FY13:                   15.8                     18.3                     28.4
FY14:                   15.3                     17.9                     22.0
FY15:                   15.8                     16.8                     19.5
FY16:                   16.8                     17.2                     31.5
FY17:                   18.9                     15.6                     23.7


8.      Valuation: Cheap
 
Even though automotive lubricants are likely to be a shrinking market in the long-term, APO may capture a share of the expanding marine lubricant market. Assuming that APO’s lubricants are able to compete – in terms of service, price, and quality – with the larger players, assuming that the increase in APO’s production capacity may lead to higher sales and profits, and assuming that the heated competition in the marine lubricant market cool, APO may eventually be able to return to its 10-year average profit of $4m per year.

Assuming that APO's long-term average earning over the long-term is $4m per year, and that its business is worth a 9x multiple – given the higher probability of long-term demands for its products – this values APO's business at $36m. Assuming that APO is sitting on $20m of excess net cash, and adding this to the value of APO's business, we get a $56m for valuation of APO. This $56m valuation is close to its latest book value of $55m. At current share price of $0.205, market is pricing APO at only $33m.


9.      Privatisation: Affordable for Controlling Shareholder
 
Perhaps instead of paying out a large special dividend, management may consider taking APO private. Since it is unlikely for APO to have any need to raise capital by selling shares (it is swimming in cash), and since its daily trading volume is very low (if any at all), it does not make sense for APO to spend a few hundred thousand on listing fees and compliance-related expenses. The money saved will no doubt give a meaningful boost to its bottom line.

Furthermore, after being listed for almost 20 years, and having served as a toll blender for several international customers, APO’s reputation should be strong enough to no longer require the credibility gained from being a listed company.

Financially, it does not cost a lot for management to take the company private. Assuming that APO is taken private at a valuation of $55m, and since Dr Ho, his family, and his extended family own about 60% of the company, the Ho clan only needs to buy out the remaining 40% at a cost of $22m. They can take a bridging loan to acquire the 40%, and then use the cash from the company – where there is $25m, not including the $10m earmarked for plant upgrading – to repay the loan once the company is acquired. It will probably take only 6-7 years for them to earn back the $22m paid, and it could be faster if they reduced their salaries.

While privatisation may seem like a long shot, the Ho clan do stand to gain much from it in the long-term.
 

10.      Food for Management’s Thought
 
Reviewing APO’s history since its listing, it is clear that APO’s core business has been mostly well-managed, and its capital allocation decisions mostly positive. In the face of more intense competition due to the anticipation of new technology, APO remained profitable and appears likely to continue doing so in the future, as SEA’s market for its products continue to grow. As APO enters its third decade as a listed company – where book value has grown from $10m to $56m over the two decades – and net cash sits at elevated levels, it seems that the only ingredient missing from what will make APO well-regarded by the capital markets, is the provision of meaningful reward for minority shareholders.

(30-03-2019, 01:50 PM)karlmarx Wrote: AP Oil's (APO) profit and share price has taken a beating over the past two years. Yet, this is also one of the few companies where net cash equal market cap, business continues to be profitable and cash flow generative, and dividends continue to be paid. Is there an opportunity at present price?
 

1.      Abstract
 
Publicly available information since APO’s listing shows that the company has kept its focus on trying to perform two things well. The first is growing its core business of blending and selling lubricants. The second is to invest the accumulated profits from the core business, into profitable businesses, at opportune moments. The results of its efforts in these two aspects has been largely positive, which resulted in its book value growing from $10m since IPO to $56m presently. However, in the course of growing the company’s book value, most of its earnings were retained and very low dividends were paid, especially during the first decade after its IPO. As the company undergoes leadership succession amidst intense competition in the local lubricant market, a sizeable capital expenditure to upgrade and increase the capacity of its plant and jetty at Pioneer Road is being undertaken. Meanwhile, a massive amount of net cash still sits on its balance sheet. 


2.      The Business: Largely Stable
 
Since 2010, historical data on profitability demonstrates that APO to be rather well-managed. Apart from the poor results from recent years – which was due to more intense competition resulting in margin compression – APO generated a rather high ROA of about 10%.
 
                             NP                        GPM                    ROA
FY10:                   4,722                   19.09%               13.32%
FY11:                   4,164                   19.27%                10.24%
FY12:                   5,762                   16.47%                13.28%
FY13:                   4,563                   20.67%                9.02%
FY14:                   4,995                   17.47%                9.03%
FY15:                   4,221                   15.85%                6.72%
FY16:                   3,495                   16.48%                5.38%
FY17:                   2,422                   12.09%                3.88%
FY18:                   2,006                   12.57%                3.07%
                            
APO thrives on being a low margin and high volume business. Inventory turnover has been less than 2 months, and more recently, less than 1 month. Receivable turnover has also been consistent at less than 2 months. As payable turnover also do not exceed 2 months, this means APO only requires enough cash for 2 months of orders, at any one time, if it doesn’t increase its orders. These make APO rather light in working capital requirements.

And since the value of APO’s products – mainly lubricants for marine and automotive engines – lie in its blending formula, there is no need to change machinery (e.g. mixing tanks, filling lines) to produce a product of different specification. This is unlike most other forms of mechanical manufacturing, where an upgrade of machinery may be required to produce products of different/better specification. APO thus enjoyed low capital expenditure requirements; some repairs from year to year, but nothing major.

The low working capital and capital expenditure requirements means that APO does not require much cash to finance its operations. Indeed, APO is able to produce positive free cash flow on most years (the large negative FCF in FY17 was due to its $5.1m investment, with MoneyMax, into a financial leasing business in Chongqing), and has been consistent in maintaining a very low liabilities to asset ratio. 
                                          
                        FCF ($,000)         Rec. Turnover      Inv. Turnover             LTA Ratio
FY10:                   -136                     1.18                     1.57                     17.57%                                           
FY11:                   3,731                   1.88                     1.47                     19.70%
FY12:                   5,632                   1.17                     1.01                     15.75%
FY13:                   6,310                   1.52                     1.80                     19.04%
FY14:                   5,163                   1.25                     1.12                     16.18%
FY15:                   2,553                   2.22                     1.16                     17.32%
FY16:                   7,431                   1.43                     1.33                     15.01%
FY17:                   -3,782                  1.41                     0.74                     14.48%
FY18:                   1,877                   1.50                     0.78                     15.48%
 
The low receivable turnover, with the absence of any major bad debt impairment, also means that APO has been correct on its selection of credit-worthy customers. Or that it had very strict credit policies. Aegean Marine Petroleum – which was APO’s largest customer for FY17 – where Aegean contributed more than 10% of APO’s $91m revenue – filed for bankruptcy last year. APO’s net claims against Aegean is only US$160k.
So good was APO in generating and hoarding cash that its cash balance swelled over the years to a level that nearly equal its market value. Since APO does not need most of this cash to fund working capital and growth in capital expenditure – as previously discussed – it could actually return most of it, if the BOD wanted to. Assuming this cash balance is removed, and replaced with a more reasonable sum of $5m for working capital, the business is revealed to be generating very high ROA, albeit lower in recent years.                                                                                               
 
                         Total Assets            Cash               Less Cash plus $5m              Adjusted ROA
FY10:                   35,462                 13,091                 27,371                               17.25%                             
FY11:                   40,659                 16,039                 29,620                               14.06%
FY12:                   43,399                 20,443                 27,956                               20.61%
FY13:                   50,585                 26,211                 29,374                               15.53%
FY14:                   55,289                 31,303                 28,986                               17.23%
FY15:                   62,768                 31,215                 36,553                               11.55%
FY16:                   65,021                 38,278                 31,743                               11.01%
FY17:                   62,393                 32,033                 35,360                               6.85%
FY18:                   65,270                 34,535                 35,735                               5.61%


3.      Electrification of Vehicles in SEA: Unlikely
 
However well APO performed in the past does not mitigate its poor performance in the present. Few details are revealed in its public filing discussions, save for ‘competition in marine lubricants’ for FY18 and FY17, and ‘sluggish business conditions’ for FY16. Will APO’s earnings be able to recover?

The largest threat to APO’s business is disruption from new vehicle technology. As vehicles are more likely than ships to transition from being powered by internal-combustion engine (ICE) to batteries in the near future, it makes sense for lubricant manufacturers to pivot from selling to vehicle-end-users, to ship-end-users. Competition in the marine lubricant market has been cited by APO as the reason for falling profits in the past two years.

As it is perceived that the total market for lubricants will gradually shrink due to decrease in vehicle-end-users, the competition between lubricant manufacturers – and there are plenty of them in Singapore – naturally become more intense.

https://www.mckinsey.com/industries/oil-...c-vehicles
 
However, it does not seem likely that ICE vehicles will be quickly replaced in the region, as electric vehicles (EVs) ownership remains a tiny fraction of overall vehicle population. In the major South East Asian (SEA) cities – Bangkok, Kuala Lumpur, Jakarta, and Manila – it is still difficult to spot EVs on the road.  Although some steps have been taken by the governments to promote the use of EVs, such as in setting EV adoption targets, it seems that most are more interested in attracting EV manufacturers to set up plants in their countries – where jobs are created and taxes levied – than actually ‘electrifying’ their country’s vehicle population, which will result in higher government expenditure. Furthermore, the higher cost of EVs put them out of reach of the regular South East Asian; the richer of whom has only recently been able to afford ICE vehicles.

https://www.malaymail.com/news/malaysia/...ns/1665532

http://www.nationmultimedia.com/detail/b...d/30354977

https://www.straitstimes.com/asia/se-asi...-ambitions

https://www.topgear.com.ph/columns/head-...0-20181012
 
Between raising the income of populace, and spending on encouraging the use of a technology which is far too expensive for most, it is clear that EV adoption will not be high on the priorities of SEA governments. For now at least. Nissan, in its quest to promote its latest EV model (Leaf) acknowledged the situation:

Despite the virtues of EVs, and outlook of a long-term upward trend, the so-called “electrification” of the region has been slow to take off. Penetration remains minuscule.

For EV adoption to make considerable progress and spur demand, governments in South East Asia needs to play a more crucial role in providing incentive, adopting standards, aligning taxation norms, and most importantly, facilitating the set-up of charging infrastructure.

https://newsroom.nissan-global.com/relea...32083d9d3a


4.      Market for Marine Lubricants: Likely to Expand

If it is unlikely that ICE vehicles will be replaced by EVs in SEA, then it may mean that the competition in the marine lubricant market is likely to ease, eventually. Perhaps in anticipation of better market conditions, APO is expanding its production capacity.

On June 2018, APO announced that it has awarded an $8.7m contract to build a new office at its 18 Pioneer plant. In addition to the office, it will also be purchasing machinery (i.e. tank and piping) and performing civil works (i.e. jetty construction), where the total bill is expected to be about $10.6m. This capital expenditure has to be done to extend its lease at Pioneer for another 20 years, which is presently expiring in 2024. APO claims that the plant improvements will allow it to increase sales volume. Whether this capital expenditure will generate satisfactory returns is not certain.
The upside to this facilities upgrading project is that the market for marine lubricants in Singapore is likely to be larger in the future. The increase in demand for marine lubricants can come from two sources.

The first is from an increase in shipping activity. Singapore port is a popular stop-over destination for ships travelling between Asia and Europe.Apart from transhipping containers, ships frequently stop-over in Singapore to purchase bunker and supplies, such as marine lubricants. As it is expected that container transhipment will continue to increase – the construction of the Tuas Mega Port being such an anticipation – this means more and bigger ships calling at Singapore, which means a largermarket for sellers of marine lubricants.
 
Number of Vessel Arriving at Singapore Port
                        For Supplies                      Total Arrivals
2008:                  20,199                               131,695
2009:                  20,694                               130,575
2010:                  21,629                               127,299
2011:                  22,685                               127,998
2012:                  24,166                               130,422
2013:                  26,334                               139,417
2014:                  27,340                               134,883
2015:                  29,756                               132,922
2016:                  31,265                               138,998
2017:                  30,946                               145,147
2018:                  28,819                               140,768
 
The second is from an increase in offshore oil & gas activity. The construction, maintenance, and provision of supplies to offshore oil and gas platforms provided a steady source of work for offshore support vessels (OSVs), such as anchor handling tug supply, platform supply and other related vessels. These offshore support vessels in the region operate in the oil and gas blocks off the coast of Thailand, Malaysia, Indonesia, and Philippines. As the number of such vessels grew during the earlier part of this decade, so did the demand for marine lubricants, which is required for the maintenance of these vessels.

But as demand for OSVs waned since the correction of oil prices in 2014, more of them are mothballed, or operating on very thin margins. The eventual return of offshore O&G activity will bring back demand for APO’s marine lubricants, which is sold regionally. Presently, utilisation of OSVs in the region has been reported to be around 50%, with about 400 of them cold stacked.

https://www.osjonline.com/news/view,sout..._56912.htm
 
Yet, APO's effort to increase production capacity will be for naught if the quality of APO’s lubricants are poor and does not provide sufficient value proposition to the customer. After all, the market is dominated by numerous oil majors. So if we are not users of APO’s lubricants, how do we know if they are any good?

The Asian Lubricant Manufacturers Union was launched on March 2018. Dr Ho Leng Woon, Exective Chairman of APO, was named the Council Chairman. For Dr Ho and APO to be chairing the Council, it would not be unreasonable to claim that either possess a somewhat reasonable level of respect and clout in the industry. It would also be remiss if this newly formed organization is chaired by a company whose products are of poor quality or repute. After all, APO does have a history of blending lubricants for oil majors such as Sinopec, Aegean, and more recently, Puma Energy.

https://www.asianlubricantmanufacturers.org/


5.      Capital Allocation Ability: Largely Positive 

Another key aspect of APO’s strategy is to reinvest profits into business acquisition, joint-ventures, or equity stakes without any management role, while the rest – as we have seen – were squirreled into its bank account.

APO’s first acquisition was AIM Chemical, purchased prior to IPO, and then GB Chemicals in 2004. Both were purchased at about 3x P/E, and have made consistent contributions to APO since.

Soon after listing, APO also invested $4m into constructing and operating an 80%-owned lubricant manufacturing plant in Vietnam. But in 2006, this JV was sold, ostensibly to recoup the trading losses incurred in 2005 when its supplier failed to deliver. As APO then failed to deliver to its buyer, it faced large losses due to a breach of contract. In 2008, APO invested $2m for a 30% stake in another for another plant in Vietnam. This plant, AP Saigon Perto JSC, continues to contribute to APO’s bottom line to this day.

In 2009, APO – through GB Chemicals – purchased a 38% stake in Systematic Laundry & Uniform Services for $750k. This was sold in 2014 for $2.3m. In 2015, APO purchased a 60% stake in a local chemical trading company Heptalink for $743k. It seems that trading is not APO’s forte, or maybe it was just bad luck, because Heptalink lost $1.1m that very year it was acquired. In 2018, Heptalink was wound up.

APO’s last investment was made in 2016. APO paid $5.1m for a 12.5% equity stake in a financial leasing business with Chongqing Zongshen Powermachinery and MoneyMax Financial Services. APO holds the option to sell its stake back to Zhongshen, for a sum that is higher of its original capital or an agreed market value. It is likely that APO will sell the stake sometime in the future, when the business has grown (in value).
             
Year      Investment                                                              Outcome
2000:    A.I.M Chemical                                                    Positive, 100% subsidiary
2004:    GB Chemical                                                       Positive, 100% subsidiary
2006:    AP Petrochemical (Vietnam)                                  Positive; 80% JV, sold
2008:    AP Saigon Petro JSC                                            Positive, 30% associate
2009:    Systematic Laundry & Uniform Services                 Positive; 38% associate, sold
2015:    Heptalink                                                           Negative; 60% subsidiary, sold
2016:    Chongqing Zongshen Financial Leasing                 Unknown


6.      Dividends: Increased over the years, but more can still be distributed
 
As it is APO’s strategy to accumulate cash for reinvestment into other various ventures (as mentioned) and growth (such as its recent plant upgrading), the dividends distributed to shareholder inevitably suffer as it stands low on management’s priority. In the first 9 years of APO’s listing, dividend was either low or not distributed.
 
($'000)                Net Profit           Dividends           Payout Ratio
FY01 (IPO):          1,905                   349                      18.3                    
FY02:                   2,392                   303                      12.6
FY03:                   2,388                   787                      32.9
FY04:                   1,440                   211                      14.6
FY05:                   -5,606                  0                           0
FY06:                   6,937                   0                           0
FY07:                   2,809                   0                           0
FY08:                   5,654                   0                           0
FY09:                   2,425                   0                           0
Total:                  20,344                1,650                     8.11
 
In the following 9 years, APO distributed higher dividends consistently, with a slightly higher payout ratio. This is a marked improvement in rewarding shareholders. But it is still rather low, especially when compared to other dividend-paying companies.
 
($'000)                Net Profit           Dividends           Payout Ratio
FY10:                   4,722                   1234                    26.3
FY11:                   4,164                   823                      19.7
FY12:                   5,762                   823                      14.2
FY13:                   4,563                   823                      18.0
FY14:                   4,995                   823                      16.4
FY15:                   4,221                   823                      19.5
FY16:                   3,495                   823                      23.5
FY17:                   2,422                   1234                    50.9
FY18:                   2,006                   823                      41.0
Total:                  36,350                 8,229                    22.6
 
In more recent years, the dividend payout ratio has actually been increasing, but that is because the amount of dividends remained the same while NP has been falling.  So another way of looking at this is that perhaps APO shareholders should be glad that the low base dividends meant that it need not be cut during times of falling profits. After all, the falling profits would have given the BOD the perfect reason to reduce/stop dividends – since it was only a fraction compared to their KMC, and hence would not greatly impact their overall income – but they did not.

Nevertheless, comparing the past 9 years' total profits and total dividends, there is no doubt that APO could have been a little more generous with rewarding shareholders. Assuming that APO needs to spend another $8m on its plant upgrading project – FY18 cash flow statement showed it spent $3m on PPE – APO will still have a cash balance of $25m, even if it does not generate any additional operating cash flow for FY19. Given APO's low working capital requirement – as described earlier – and its presently ongoing $10m plant upgrading project, it should have no short and long term need for most of this remaining $25m. It should therefore have no problem paying out at least half of it.


7.      Key Management Compensation: Fair and Comparable
 
The table below shows Key Management Compensation (KMC) over the past 9 years. It should strike observers that APO has been very consistent with the absolute amount it pays management; $2m every year regardless of gross profit level. On most of the better years, KMC is almost half of Net Profit (NP). On bad years like FY17, KMC is almost as much as NP. Overall, more of the Gross Profit (GP) is being consumed by KMC; from 14.% in FY10 to 18.9% in FY17. Is APO's management fairly remunerated?
 
($'000)                 KMC                    GP                   KMC as % of GP                            
FY10:                   2,050                  14,125                 14.51%                             
FY11:                   2,050                  12,779                 16.04%
FY12:                   2,147                  14,834                 14.47%
FY13:                   2,107                  13,324                 15.81%
FY14:                   2,102                  13,699                 15.34%
FY15:                   2,148                  13,580                 15.82%
FY16:                   2,192                  13,042                 16.81%
FY17:                   2,107                   11,117                 18.95%
FY18:                   n.a.                      9,852                   n.a.
 
But when compared to other listed companies of similar size and industry – United Global and Chemical Industries (Far East) – APO's management remuneration does not seem to be an anomaly. United Global's KMC to GP ratio has been trending lower, but it should also be noted that they paid themselves a handsome US$21m dividend prior to IPO (which is almost triple of what they raised from the IPO). For Chemical Industries, its KMC to GP ratio is much higher compared to the two other companies.
 
KMC to GP Ratio
(%)                      APO               United Global        Chemical Industries
FY10:                   14.5                     n.a.                      18.7
FY11:                   16.0                     n.a.                      24.7
FY12:                   14.4                     n.a.                      24.9
FY13:                   15.8                     18.3                     28.4
FY14:                   15.3                     17.9                     22.0
FY15:                   15.8                     16.8                     19.5
FY16:                   16.8                     17.2                     31.5
FY17:                   18.9                     15.6                     23.7


8.      Valuation: Cheap
 
Even though automotive lubricants are likely to be a shrinking market in the long-term, APO may capture a share of the expanding marine lubricant market. Assuming that APO’s lubricants are able to compete – in terms of service, price, and quality – with the larger players, assuming that the increase in APO’s production capacity may lead to higher sales and profits, and assuming that the heated competition in the marine lubricant market cool, APO may eventually be able to return to its 10-year average profit of $4m per year.

Assuming that APO's long-term average earning over the long-term is $4m per year, and that its business is worth a 9x multiple – given the higher probability of long-term demands for its products – this values APO's business at $36m. Assuming that APO is sitting on $20m of excess net cash, and adding this to the value of APO's business, we get a $56m for valuation of APO. This $56m valuation is close to its latest book value of $55m. At current share price of $0.205, market is pricing APO at only $33m.


9.      Privatisation: Affordable for Controlling Shareholder
 
Perhaps instead of paying out a large special dividend, management may consider taking APO private. Since it is unlikely for APO to have any need to raise capital by selling shares (it is swimming in cash), and since its daily trading volume is very low (if any at all), it does not make sense for APO to spend a few hundred thousand on listing fees and compliance-related expenses. The money saved will no doubt give a meaningful boost to its bottom line.

Furthermore, after being listed for almost 20 years, and having served as a toll blender for several international customers, APO’s reputation should be strong enough to no longer require the credibility gained from being a listed company.

Financially, it does not cost a lot for management to take the company private. Assuming that APO is taken private at a valuation of $55m, and since Dr Ho, his family, and his extended family own about 60% of the company, the Ho clan only needs to buy out the remaining 40% at a cost of $22m. They can take a bridging loan to acquire the 40%, and then use the cash from the company – where there is $25m, not including the $10m earmarked for plant upgrading – to repay the loan once the company is acquired. It will probably take only 6-7 years for them to earn back the $22m paid, and it could be faster if they reduced their salaries.

While privatisation may seem like a long shot, the Ho clan do stand to gain much from it in the long-term.
 

10.      Food for Management’s Thought
 
Reviewing APO’s history since its listing, it is clear that APO’s core business has been mostly well-managed, and its capital allocation decisions mostly positive. In the face of more intense competition due to the anticipation of new technology, APO remained profitable and appears likely to continue doing so in the future, as SEA’s market for its products continue to grow. As APO enters its third decade as a listed company – where book value has grown from $10m to $56m over the two decades – and net cash sits at elevated levels, it seems that the only ingredient missing from what will make APO well-regarded by the capital markets, is the provision of meaningful reward for minority shareholders.

AP Oil released FY2019 results. Revenue decreased 20% to S$62.8 million due largely to lower trading volume in FY2019. However, gross profits increased by 5% from FY2018 to 16.41%. Net profit increased 17% to $2.34 million. Proposed 2019 final tax exempt dividend of 0.75 cent per ordinary share. At current $0.175/share, that equates to 4.3% dividend yield.

2019 was the first year Gross Profits rose after it has been declining y-o-y. Have the company finally steered the ship around? Management seem to think so after increasing dividend from 0.50 cent in FY2017 and FY2018 to 0.75 cent in FY2019. That equates to a 50% increase.

In the FY2018 annual report, Chairman stated "More excitingly, the Group has, in the second half of 2018, successfully secured a number of potential longterm key customers from the USA, Russia and the Middle East, inspiring confidence in our future business." And in the FY2019 results release, "Gross profit increased by 5% due to improvement in gross margin by 4 percentage points to 16.4% as a result of reduced sales from low margin base oil supply business and improved margin from manufacturing activities." So it seems that they have reduced their low margin trading business resulting in lower revenue but at the same time those new longterm key customers resulted in higher margins.

With FY2019 EPS at 1.43cents and $0.175/share, Trailing PE is very very reasonable at 12x. Subsidiaries AP Saigon Petro JSC and Chongqing Zongshen Financial Leasing are seemingly going through growth from their contribution as well.

There are a few reasons i think why it is a good time to invest in AP Oil.
1) Increase in gross profit after y-o-y decline.
2) 50% increase in dividend payout.
3) Big part of company valuation is sitting on net cash.
4) Easy takeover target by the controlling family.
5) Last but not least, due to Covit-19, I suspect the company's FY2020 will be bigger/better compared to FY2019 from higher demand for one of their subsidiary's products/services.

This might be the very start of the turning point for AP Oil.

If there was an intent by the Ho family to privatise the company, I think they may have missed it. The very low valuation over the past 12 months would have made a half-decent offer look good, but it didn't happen. Instead, they have increased dividends have increased by 50%. This will likely cause the share to trade at a higher price, which will only make it more difficult to for the Ho family to privatise cheaply. So I don't think there is an intent to privatise the company, at least for now.

AP Oil's years of low dividend payout ratio has been a sore point for opmi. The increase in ordinary dividends, and not the provision of a special dividend, may mean that the company intends to maintain a 0.75 cents payout on a recurring basis. After maintaining 0.5 cents for the previous decade, the company is showing progress by initiating (and possibly maintaining) 0.75 cents for the new decade.

A 0.75 cents dividend is only about half of their FY19 earnings -- earnings which have been lowered by increased competition for the past 3 years. Assuming that the company is able to maintain or improve its FY19 performance, there should be no problems maintaining a 0.75 cent dividend.

Indeed the company's market value is sitting on its cash balance. But an exceptionally large excess cash balance does not serve the shareholders. Now that the company is close to completing the renewing of its plant and lease at 18 Pioneer Sector 1 -- which has used up a meaningful portion of its cash balance -- the remaining cash balance should be unencumbered against future (planned) expenditures. Will the Board return some of this cash to shareholders, or will they continue to look for ways to invest it?

While a return of cash to opmi is welcome, the more possible driver of shareholders returns is likely to be from the higher production capacity of its renewed plant. If the CEO's optimism and confidence -- from the FY18 AR -- is not misplaced, the results should be apparent in FY20 results.

The covid-19 situation may well provide a boost to the sales of GB Chemicals' sanitiser, disinfectant, and detergent products. But since their sales are to industrial/business customers, and not consumers, the results may be mixed. Depending on the impact on their customers, and corresponding their response, some establishments may have a heightened cleaning schedule, while others may have less of a reason to clean due to lower business activity. Regardless of whether GB Chemicals will benefit or otherwise, this is probably a one-off event. The more important question is whether the Board has plans to grow GB Chemicals (and the other subsidiaries) meaningfully in the future.

(28-02-2020, 08:34 AM)karlmarx Wrote: If there was an intent by the Ho family to privatise the company, I think they may have missed it. The very low valuation over the past 12 months would have made a half-decent offer look good, but it didn't happen. Instead, they have increased dividends have increased by 50%. This will likely cause the share to trade at a higher price, which will only make it more difficult to for the Ho family to privatise cheaply. So I don't think there is an intent to privatise the company, at least for now.

AP Oil's years of low dividend payout ratio has been a sore point for opmi. The increase in ordinary dividends, and not the provision of a special dividend, may mean that the company intends to maintain a 0.75 cents payout on a recurring basis. After maintaining 0.5 cents for the previous decade, the company is showing progress by initiating (and possibly maintaining) 0.75 cents for the new decade.

A 0.75 cents dividend is only about half of their FY19 earnings -- earnings which have been lowered by increased competition for the past 3 years. Assuming that the company is able to maintain or improve its FY19 performance, there should be no problems maintaining a 0.75 cent dividend.

Indeed the company's market value is sitting on its cash balance. But an exceptionally large excess cash balance does not serve the shareholders. Now that the company is close to completing the renewing of its plant and lease at 18 Pioneer Sector 1 -- which has used up a meaningful portion of its cash balance --  the remaining cash balance should be unencumbered against future (planned) expenditures. Will the Board return some of this cash to shareholders, or will they continue to look for ways to invest it?

While a return of cash to opmi is welcome, the more possible driver of shareholders returns is likely to be from the higher production capacity of its renewed plant. If the CEO's optimism and confidence -- from the FY18 AR -- is not misplaced, the results should be apparent in FY20 results.

The covid-19 situation may well provide a boost to the sales of GB Chemicals' sanitiser, disinfectant, and detergent products. But since their sales are to industrial/business customers, and not consumers, the results may be mixed. Depending on the impact on their customers, and corresponding their response, some establishments may have a heightened cleaning schedule, while others may have less of a reason to clean due to lower business activity. Regardless of whether GB Chemicals will benefit or otherwise, this is probably a one-off event. The more important question is whether the Board has plans to grow GB Chemicals (and the other subsidiaries) meaningfully in the future.

Thanks for the unbiased input Karl, always well appreciated. As you mentioned, the company has finally increased the ordinary dividend after a decade of keeping it constant. Its important to note that this comes at a time when revenue and profits are roughly half of the past decade, so it is a bigger sign of confidence from management that it is bottoming out and poised for growth.

As for GB Chemicals, there might indeed be the concern of less reason to clean due to lower business activity. However, I note that inquiries for their products have been returned with a "sold out" reply. They are taking in orders except with a longer fulfillment date. The large majority of their sales are to industrial customers, but this is a period where we may see sales to consumer (which will benefit as a one-off event). Also, companies are definitely being encouraged to practice better hygiene so I think demand for detergent/disinfectant/sanitizers as consumables will increase due to using more per use and using more frequently.

The CEO has expressed in previous interviews (publicly available) that they are actively looking at new ventures to grow the company's top/bottom line. The company has a good track record in acquisitions and this might be a good time for them to make a move. 

(Newly vested with a biased opinion.  )

(28-02-2020, 11:07 AM)sillyivan Wrote: However, I note that inquiries for their products have been returned with a "sold out" reply. They are taking in orders except with a longer fulfillment date.

That's an interesting nugget of information. Did you call to inquire? If order volume and selling price is meaningfully higher than average, I guess there may be a boost to its HY20 results.

Anyway, it's a shame that both of APO's longest-held acquisitions -- AIM and GB -- did not experience higher growth rates since being acquired 15-20 years ago.

As for APO using its cash to make investments, it has been 5 years since it was first mentioned. And that was when oil prices crashed, the economy slowed, and asset values were cheaper. Either they couldn't find anything good to buy, or nothing good was cheap enough for them. Fast forward to present, they may have missed out on a good deal, but they may also have escaped buying a lemon. A businessman and an investor isn't so different in having to make decisions based on their future outlook.

Looking at their past behaviour, it is probably safe to conclude that they are more conservative with their bets. Slow but safe, or fast but dangerous; businessmen and investors alike have to take their pick.

(28-02-2020, 08:34 AM)karlmarx Wrote: If there was an intent by the Ho family to privatise the company, I think they may have missed it. The very low valuation over the past 12 months would have made a half-decent offer look good, but it didn't happen. Instead, they have increased dividends have increased by 50%. This will likely cause the share to trade at a higher price, which will only make it more difficult to for the Ho family to privatise cheaply. So I don't think there is an intent to privatise the company, at least for now.

AP Oil's years of low dividend payout ratio has been a sore point for opmi. The increase in ordinary dividends, and not the provision of a special dividend, may mean that the company intends to maintain a 0.75 cents payout on a recurring basis. After maintaining 0.5 cents for the previous decade, the company is showing progress by initiating (and possibly maintaining) 0.75 cents for the new decade.

A 0.75 cents dividend is only about half of their FY19 earnings -- earnings which have been lowered by increased competition for the past 3 years. Assuming that the company is able to maintain or improve its FY19 performance, there should be no problems maintaining a 0.75 cent dividend.

Indeed the company's market value is sitting on its cash balance. But an exceptionally large excess cash balance does not serve the shareholders. Now that the company is close to completing the renewing of its plant and lease at 18 Pioneer Sector 1 -- which has used up a meaningful portion of its cash balance --  the remaining cash balance should be unencumbered against future (planned) expenditures. Will the Board return some of this cash to shareholders, or will they continue to look for ways to invest it?

While a return of cash to opmi is welcome, the more possible driver of shareholders returns is likely to be from the higher production capacity of its renewed plant. If the CEO's optimism and confidence -- from the FY18 AR -- is not misplaced, the results should be apparent in FY20 results.

The covid-19 situation may well provide a boost to the sales of GB Chemicals' sanitiser, disinfectant, and detergent products. But since their sales are to industrial/business customers, and not consumers, the results may be mixed. Depending on the impact on their customers, and corresponding their response, some establishments may have a heightened cleaning schedule, while others may have less of a reason to clean due to lower business activity. Regardless of whether GB Chemicals will benefit or otherwise, this is probably a one-off event. The more important question is whether the Board has plans to grow GB Chemicals (and the other subsidiaries) meaningfully in the future.

not sure if you guys miss it, AP oil pays 0.75c in FY2016 as well, but reduce it to 0.5c in FY2017. Other than that the rest of the decade pay 0.5c

The 0.75 cent dividend in FY16 consisted of a 0.5 cent ordinary and a 0.25 cent special. The signal sent was quite clear that the 0.75 cents in FY16 was not something shareholders should expect to be repeated.

Now that they are proposing a 0.75 cent ordinary dividend, shareholders may be expecting that they intend to maintain it in subsequent years. But of course, we have no way of knowing for sure.

(01-03-2020, 08:36 AM)karlmarx Wrote: The 0.75 cent dividend in FY16 consisted of a 0.5 cent ordinary and a 0.25 cent special. The signal sent was quite clear that the 0.75 cents in FY16 was not something shareholders should expect to be repeated.

Now that they are proposing a 0.75 cent ordinary dividend, shareholders may be expecting that they intend to maintain it in subsequent years. But of course, we have no way of knowing for sure.

I check back the SGX announcement and annual reports - no mention of special, just say final dividend of 0.75c

2016 annual report:

(29-02-2020, 08:28 AM)karlmarx Wrote:

(28-02-2020, 11:07 AM)sillyivan Wrote: However, I note that inquiries for their products have been returned with a "sold out" reply. They are taking in orders except with a longer fulfillment date.

That's an interesting nugget of information. Did you call to inquire? If order volume and selling price is meaningfully higher than average, I guess there may be a boost to its HY20 results.

Anyway, it's a shame that both of APO's longest-held acquisitions -- AIM and GB -- did not experience higher growth rates since being acquired 15-20 years ago.

As for APO using its cash to make investments, it has been 5 years since it was first mentioned. And that was when oil prices crashed, the economy slowed, and asset values were cheaper. Either they couldn't find anything good to buy, or nothing good was cheap enough for them. Fast forward to present, they may have missed out on a good deal, but they may also have escaped buying a lemon. A businessman and an investor isn't so different in having to make decisions based on their future outlook.

Looking at their past behaviour, it is probably safe to conclude that they are more conservative with their bets. Slow but safe, or fast but dangerous; businessmen and investors alike have to take their pick.

I did not call personally to enquire (I don't have anything to do with cleaning businesses) but I know people who did and that was the consensus/response received. They are having problems keeping up with the demand from what I understood and if they are any good business people, they will find a way to increase their production capacity to fulfill orders. Even if this could be only a one-off event, I believe there could be a positive impact in the long term if the new customers are recurring. Another nugget of information I noted myself was that sales price increased about 15% from before, which would boost their net profit margins.

I definitely agree on the point that they have been slow to invest their money. I hope that this points to the management being extremely prudent in their decision making rather than them resting on their laurels. On this point, I highly suggest to read the Chairman and CEO's statements in FY2018 Annual Report.

For those lazy,

Chairman states "We will spend about S$14 million in building new factory, warehouse, office premises, upgrading production lines, setting new laboratory and adding R&D equipment. Building works are scheduled to reach completion by August 2019."

CEO mentioned as well that "On the marine lubricants front, we are partners with Gazpromneft Lubricants, Gazpromnefts’ oil business operator, specialised in marine lubricants production and sales. We also partnered with ENOC, the Emirates National Oil Company, UAE. These partnerships are for toll blending of marine lubricant finished products in our plants in Singapore. In addition, in November 2018, AP Oil partnered AMSOIL Lubricants Pte Ltd, to toll blend synthetic lubricants in Singapore for renewable energy and industrial applications. We have started blending and delivered the products in 2018. Though these volumes have some way to go in replacing the lost volume from Aegean, these are green-shoots worth tending and nurturing. These partners are strong brand names and serious companies, and we count ourselves blessed that they have chosen to place their trust in us."

As with organic growth, they take time to nurture and since it has been 1.5 years till date I would think these new developments should see a bigger impact on the top and bottom line for FY2020. We have already seen an increase in gross profit margin in FY2019.

AP Saigon Petro JSC appointed a new CEO in 2018 and succession planning is also underway for both AIM Chemicals and GB Chemicals. With new leaderships, new vigor tend to come in the initial years.

Finally CEO also mentioned "The production facilities at 30 Gul Crescent will also be upgraded to cater for new business requirements. We will space these upgrades out throughout the year to avoid affecting production schedules. The improved building and filling lines, jetty capabilities and better laboratory capabilities are investments for the future."

In this aspect, I have been following the shipping industry for some time now and believe the tide is turning. After a long and protracted bear market, the cycle is finally showing initial signs of an upturn. This would be a long discussion in itself, however what's important is that it will most probably lead to better margins in their marine lubricant business as well.

All of the above are my own personal opinions, and in this chaotic market environment where every index is down and more bloodshed is likely, AP Oil forms a sort of a hedge of my own. Why do I say so?
- huge amount of cash and supremely ready for the downturn, no debt to cover which means 0 chance of filing for bankruptcy practically
- geography of its business is widely diversified (SG market is only around 55% of its business)
- PE ratio is very reasonable and in times of market sell-off, in general companies with higher PE ratio will see bigger declines in share value
- the lubricant industry will never see 0 demand and AP Oil is a longtime steward
- why not get paid 4% dividend while waiting for the market to recover in the years to come before redeploying capital elsewhere? with such a huge cash hoard and very reasonable dividend payout ratio, board will never need to borrow debt to maintain dividend yield. (you've seen "high dividend companies" like Starhub cutting dividend as it is unsustainable)