Falcon Energy Group

[Musicwhiz]

I took a glance at the financials of Falcon Energy Group (FEG) as at June 30, 2010....

1) Gross margin was 50.9% for 1H 2010 compared to 49.4% for 1H 2009. Obviously FEG is in a position to enjoy strong gross margins from their business. However, a quick look at finance costs shows that it is rapidly rising; up 489.5% to US$2.1 million for 1H 2010. This is about 5.7% of revenues. Admin costs also went up 40.7%, highe than the increase in gross profit of 37.6%; but this was offset by better contributions from share of profits of assoc.

2) High gross and net margins notwithstanding, the Balance Sheet appears to have deteriorated significantly in just 6 months. The most noticeable is the drop in cash and bank balances from US$48.3 million to US$17.6 million (-63.5%). Borrowings, on the other hand, have surged. ST borrowings rose from US$14.5 million to US$25.3 million, while LT borrowings rose from US$11.7 million to US$79.8 million (+582%). What this means, in simple language, is that FEG went from being in net cash of US$22.1 million as at 31/12/2009 to net debt of US$87.5 million as at 30/06/2010. I guess that explains the reason for the issuance of 162.8 million warrants at 10c each (exerciseable at 40c).

3) Return on Equity is about 17.5% annualized for FY 2010, against 14.0% for FY 2009 (annualized). However, much of the ROE was probably fuelled by debt, rather than internal cash flows.

4) For 6M 2010, FEG generated US$12.1 million of OCF but spent US$104.7 million on investment in associates; compared to 6M 2009 there was also no FCF as US$9.4 million was generated frmo OCF while US$17.1 million was spent on capex. One should note that proceeds from term loan constituted US$96.6 million of cash inflow, but this is interest-bearing debt and weighs on the Balance Sheet.

5) Basic EPS for 6M 2010 was US 1.98 cents, if annualized it is about US 4 cents or SGD 5.2 cents. At last done market price of 49.5 cents this represents a PER of about 9.5 times. This is not exactly cheap if you consider the capital structure of the Company, in which heavy asset investment is required to maintain a competitive edge and for growing top and bottom line.

It will be interesting to continue to monitor developments at FEG. But at the moment, this company has no merits for me in terms of investment as there are too many red flags. A high gross/net margin is only good for the Income Statement, while the Balance Sheet and Cash Flow Statement are weak.

Not vested.

[Musicwhiz]

FEG reported results this evening, on Feb 26, 2011.

Revenue fell 27.6% but COGS fell less by 20.5%, and gross profit, as a result, fell by 36.7% to US$24.6 million. Gross margin was 38.1% for FY 2010 compared to 43.6% in FY 2009, for a drop of 5.5 percentage points.

Admin expenses, however, increased 34.3% to US$15.5 million, and finance costs ballooned to US$4 million (more than doubling), resulting in PBT decreasing by 60% to US$12.2 million.

Looking over to the Balance Sheet, the first glaring thing was the significant drop in cash balances from US$48.3 million to US$14.8 million. Part of the cash was injected to purchase an associated company (CH Offshore), which appeared on the Balance Sheet as a US$113.5 million number under non-current assets.

Borrowings increased significantly from a total of US$26.2 million to US$94.7 million (more than tripling), which led to the higher finance costs as mentioned earlier.

Moving over to Cash Flows, there was no FCF as operating cash flows were negated by capex spending for FY 2010. For FY 2009, there was -ve FCF of about US$15.2 million. There was also a cash outflow of US$104 million for acquisition of an associated company, the corresponding entry appears as a Dr under non-current assets as mentioned.

So it appears the Company is borrowing more from banks to finance this acquisition, and it also appears that this is principally all which occurred during the financial year worth mentioning.

Under MD&A, it was reported that charter rates were lower compared to FY 2009, and my view is that the over-supply of OSV for shallow water continues to push rates lower for all players in the O&G industry. It was also mentioned that direct costs were "fixed" for Marine Division while revenues were lower, thus gross margin declined from 61.2% to 41.4%, an almost 20 percentage point drop. This is pretty severe as it shows a deterioration in pricing power amd that there is no way to control costs as the Company seems to imply that most of it is fixed rather than variable.

A few points to raise:-

1) The Company now has net debt of about US$80 million for FY 2010 against net cash of US$22.1 million just a year ago. One reason for this was their major acquisition of CH Offshore, but would this be synergistic and create operational efficiencies to boost both revenues and profits over the medium term?

2) Why is the Company venturing into the coal mining business? Its principal activities are currently Oilfield Projects/Services and Marine Division. How does coal mining synergize?

3) Even Oilfield Services Division is venturing into oil trading, as a way of "diversifying" income. Oil trading can be volatile due to oil prices fluctuating wildy with the Libyan crisis - is the Company able to hedge their exposure effectively?

A final dividend of 0.5c per share was declared, down from 1c per share a year ago.

Last done market price was 37.5c (as at Feb 25, 2011).

(Not vested)

[GPD]

I recently took up a position with FEG and wonder if any buddies here has any thoughts on this company.

Note the it has changed in FY from 31 Dec (2012) to 31 Mar (2013) so the last FY is 15mths.

Latest results based on 9mth for FY14 (adjusting for allowances for doubt trade in its 29% own CH offshore and one-off gain from disposal of two rigs at $127mil):
EPS = 2.15 US cents (already surpass FY13 of 1.2 US cents)
P/E = 9.4
P/B = 0.9
ROE = 9.9%
ROA = 3.8%
Net Gearing = 45%

Revenue for their marine division took a hit around 2010/2011 due to less vessels (end of contract and vessels undergoing some modifications) being chartered out resulting in negative GM from this division (due to some fixed overhead). But since then, it has recovered quite well. Revenue from last three quater (9mths) already surpassed revenue from last FY (15mths). GM has been fairly stable at 34% on average.

Revenue for their oilfield service division were at its highest so far (US$67mil vs ave US$45mil in last two years) although GM dropped from a high of 25% in 2011 to 16.5%.

NP increased from US$3.3 mil in 2011 to US$9.8 mil in 2013 to US$17.6 mil so far (9mths) in 2014.

I am not sure if it has a dividend policy but seems to be paying out 30% of earning so far. Barring unforeseen events, I expect a 0.5 cents final div in the coming Q4 reporting. Together with interim 0.5 cents in Q2 this gives a 3% div yield.

The dividend yield isn't that attractive. But it seems to have gotten out of the bottom and both topline and bottomline have improved in the last 8 quarters.

Its subsidiary CH offshore has commenced legal proceeding to claim approximately US$56mil from its customers in Oct 2013. There is no guarantee that it will get anything back and it will take more than a year from then for the matter to be heard in court. Anything that they can get out of this is a bonus for FEG (and Chuan Hup as well?).

(vested)

[kyle]

Hi GPD,

Thanks for your analysis. I loaded some at 0.33 and 0.34.

Your analysis is much more complete than mine. My calculation on EPS is similar ~2.1 US cents, excluding the two rigs and the doubtful trade debt. Based on this, the whole year EPS should be above 2.8 US cents. Plus the two rigs, it is close to 7 SG cents.
Excluding the two rigs gain, the gross profit for Q1, Q2, Q3 are 9m, 10m, 12m. A very good YoY and QoQ growth. Next month, it should be able to deliver a beautiful AR. I am also expecting a 0.5 cents final div.

[kyle]

BTW, next insight has an article mentioned the possibility of FEG to privatize CH offshore, what's your vision on this?


CH Offshore
choffshore_vessel4.14


Falcon Energy


> Trading at 1x P/BV. Majority of the assets are AHTS.

> Owners are Falcon Energy (29%) and Peh Kwee Chim (24%). Falcon does not rule out privatisation. Its entry price (S$0.70) is 70% higher than current price.

> No asset overlap and earnings accretive. Falcon owns mostly barges and CH Offshore's AHTS are complementary.

[GPD]

Hi GPD,

Thanks for your analysis. I loaded some at 0.33 and 0.34.

Your analysis is much more complete than mine. My calculation on EPS is similar ~2.1 US cents, excluding the two rigs and the doubtful trade debt. Based on this, the whole year EPS should be above 2.8 US cents. Plus the two rigs, it is close to 7 SG cents.
Excluding the two rigs gain, the gross profit for Q1, Q2, Q3 are 9m, 10m, 12m. A very good YoY and QoQ growth. Next month, it should be able to deliver a beautiful AR. I am also expecting a 0.5 cents final div.

Hi Kyle, first I hope your decision to take up a position in FEG is based on your own DD.

I have no experience with M&A but based on CH Offshore earning for 2010, 2011, and 2012 of about on average US$35mil and FEG earning average earning of US$10mil, it is definitely a good thing.

Perhaps the question is how to fund this move. The remaining 71% share at today price of 42cts will cost about S$210mil and I don't know if they need to acquire all the remaining shares. Borrowing is already high so maybe best to issues new shares. Say they issues the same number of their (FEG) outstanding shares at today price of 34cts, that will provide a capital of S$277mil more than enough to buy up CH Offshore with some premium.

The resultant EPS will still double so ROE, ROA and net gearing will all improve. PE will go down so price may get re-rated. Dividend can also increase from increased earning if they maintain about 30% payout. Hm..seems too good to be true.

I must disclaim that these are just outcome from my very simplistic thought process. The whole thing may be a lot more complicated and there are downsides that I didn't see.

As usual, DYDD.

Can you also share your thought on this?

[kyle]

Nice result
http://infopub.sgx.com/FileOpen/FEG_Resu...eID=299018

Both quarterly profit and dividend are above expectation. Q4 revenue is close to 100m and GP is 14m, which are much higher than the first three quarters. This brings the full year revenue to 350m, GP to 117m, net profit to 60m.

Current NAV is 29.7 US cents. Based on current price, P/B ~ 1.07. Excluding the two rigs, the full year EPS ~ 4.7 US cents, which translates to P/E ~6.

Management is optimistic on the outlook of all the core business. It's quite possible to continue this year's strong growth.

Director bought 200K shares from open market. Another good sign!!

[investingsgx]

I am positive on this stock too. It is leveraging on low interest rates to grow their business. It's recent financial statement states that it is waiting for 5 jack up rigs to be delivered to them mid 2015 to 2016.

[GPD]

Nice result
http://infopub.sgx.com/FileOpen/FEG_Resu...eID=299018

Both quarterly profit and dividend are above expectation. Q4 revenue is close to 100m and GP is 14m, which are much higher than the first three quarters. This brings the full year revenue to 350m, GP to 117m, net profit to 60m.

Current NAV is 29.7 US cents. Based on current price, P/B ~ 1.07. Excluding the two rigs, the full year EPS ~ 4.7 US cents, which translates to P/E ~6.

Management is optimistic on the outlook of all the core business. It's quite possible to continue this year's strong growth.

Director bought 200K shares from open market. Another good sign!!

FEG did delivered a good set of results with both top and bottom growing but a few things to note.

They shifted the CHO provision to last FY so the US$7,182 Share of results of associated companies for full FY14 already excluded that. That's why the restated FY13 NP dropped from US$9.8mil to -US$3mil. I believe your EPS 4.7 US cent still include that adjustment you made previously. Based on my calculation, the core EPS is 3.2 US cent giving a PE of 10 on price of 39cts.

There is a 3-fold increase in revenue from oilfield service and this area contributed a significant portion to its revenue. Although it contributed nicely to the GP, GM dropped from 25% in FY2011 to 17.5% FY2012/13 to the current 14%.

From the commentary, seems like the only growth driver left is the marine division. The eating up of CHO is also a very distant possibility from what I gathered in this forum.

The director bought 500k.

The 1cts final dividend is 0.5cts more than I expected giving a FY div of 1.5cts. About 37% payout and 3.8% on price of 39cts.

Overall I am still (cautiously) optimistic.

[greengiraffe]

http://www.businesstimes.com.sg/premium/...e-20140813

PUBLISHED AUGUST 13, 2014
Falcon Energy Q1 net dips despite revenue surge
Gross profit margin falls; share of associates' earnings drops
BYANDREA SOH
sandrea@sph.com.sg @AndreaSohBT

OFFSHORE marine service provider Falcon Energy Group's earnings fell 2.4 per cent for the first quarter ended June 30 in spite of a more than threefold increase in revenue, as cost of sales grew by a larger proportion and its share of profits from associates dropped.
The mainboard-listed group recorded net profit attributable to shareholders of US$8.1 million, down from US$8.3 million a year ago.
Revenue rose from US$26.2 million to US$92.7 million, driven by its oilfield services division, which provides logistics, procurement and support activities to oil producers.
The division's topline contribution jumped from US$7.2 million to US$71.6 million due to engineering, procurement, construction and commissioning contracts secured in the second half of last year.