Homepage
PR Newswire
30-03-2019, 01:50 PM
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.
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.
)