Thursday, February 16, 2006

Undervalued property & gas play?

The last post rambled on the outlook for oil from the demand and supply angle. In today's post, a company which derives a substantial portion from providing engineering services to the oil & gas industries is featured.

G&W is traded on the Singapore Exchange. It is the holding company of Oakwell Engineering which also trades on the same stock exchange. [Last closing price: G&W: S$0.18, Oakwell: S$0.05] G&W has three core businesses - building materials, oil & gas and real estate, which contributes 49%, 39% and 12% respectively. Its building materials division provides concrete products such as precast and ready mix concrete to the local construction industry, parts of China (Beijing, Shenyang) and Indonesia. As for its real estate arm, it engages in property development in China. In particular, 70% of its phase 2 of its Sentosa Gardens project in Shenyang was sold. It is also exploring property management services as a means of providing a steady income stream to the group. The majority of its oil and gas division has been spun off as a separate listed entity Oakwell. It handles distributorships for oil and gas related equipment and products.

In its annual report for FY04, G&W reported a NAV per share of S$0.61. Does today's price of S$0.18 present an opportunity?

G&W holds over 57% of Oakwell. This stake translates to S$0.14 per share (Note, however, that Oakwell's NAV is only about S$0.06.). G&W is also cash rich. It has S$0.22 of cash and cash equivalents per share. The other substantial current assets of G&W are trade debtors and inventories. We are unsure whether: (a) sufficient provision has been made for allowances for bad debts, (b) inventories are realisable at recorded value. So, a discount of 20% is applied to their recorded value. This yields S$0.66 per share. G&W also owns a fair bit of plant, property and equipment. Part of the property/land lies on the Indonesian island of Batam. Due to potential geopolitical risks and short 30 year lease, the full value of such properties may not be realisable. In view of the foregoing, a generous discount of 40% is applied to the recorded value of PP&E. This yields S$0.17 per share.

It would be ideal if the valuation ended here. However, G&W has sizable amount of debt on its books. Its total liabilities amount to S$0.82 per share. The above yields a net valuation of S$0.37 per share. At the current market price of $0.18, it appears to offer a margin of safety of about 50%.



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