Falcon Energy (5FL.SI)

Falcon Energy (5FL.SI) - One of the forefront in offshore marine and also O&G sector. It is divided into 5 business sectors namely, Marine, Oilfield Services, Drilling Services, Resources Division and one more that I couldn't find (LOL!). All this, you can read from their company website. Essentially, Falcon Energy feels like Nordic Group which provides O&G support services yet has a more direct exposure to oil prices through the Drilling Services and Resources Divisions.

I started searching for an O&G company as I wanted to gain some exposure to the potential oil price movements. Truthfully speaking, I did not do any deep research into oil prices. But seeing how far it has come down and the relative stability now, I wanted to capture some gains when the industry move into the up-cycle again. And I chanced upon this stock - a rare profit-making O&G company amidst the gloom and doom. Below are some of the points I like about this company:

1. Financial Metrics

Easiest go-to method to valuate a company from the surface. Was really too lazy to predict cash flows with expected oil prices etc. The ratios I calculated were really impressive till I started to doubt the going concerns of the company (the ratios were like that of a distressed company)!

Based on the time I did my calculations, where the price was at 17.2 cents and data obtained from the latest FY report,
EPS: 6.45 US cents
P/E: 1.975
P/B: 0.348
Debt/Equity: 0.9854
Dividend: $S 0.005 (2.9% yield interim)

In this set of data, it only seem that debt-to-equity ratio is high. I give it leeway as it is expected for O&G company to have significant debt, especially in these trying times. In addition, this 2016 figure is actually lower than 2014 and 2015, having paid off a sum of debt in the latest quarter. P/E and P/B is super impressive and actually needs no explanation. In the final dividend, I will guess that another half cent of dividend will be given out, ending with a near 6% yield. Warren Buffet had always like to buy stocks with significant higher book value and I actually think Falcon Energy fits the criteria.

2. Stake in CH Offshore

Falcon Energy actually owns 86.7% stake in CH Offshore, another listed firm on SGX. When I was doing this research on Falcon Energy, the market cap of the company was 139.2M while that of CH Offshore was 282M (sitting at 275M as of 06/07/16). This means the stake Falcon Energy has in CH Offshore is worth at least 244.5M! That's right, the market is selling the core operations of Falcon Energy for nothing and its stake in CH Offshore is valued at discount! This is the singular most blatant mispricing of Falcon Energy which I didn't believe. And if I calculated wrongly anywhere, please let me know to save me the money and embarrassment.

3. Share Repurchases

The company is aggressively doing stock buyback since 17 June 2016. The volume of the stock traded is not high, hence by aggressive, I meant as a percentage of the transacted volume that day. I suspect the company is doing so to meet the minimum trading price of 20 cents and since the volume is so thin, the company is able to do so easily - since there is little sellers blocking the queue. This is an situation that can be taken advantage of as the company is essentially being a guarantor of your entry price. It started doing buying back at ~16.8 cents till 19.5 cents today. In the last 2 days, it seems that there were some public support. As of now, still monitoring closely to see if the company is still going to support at current price.

 4. Conclusion

I had actually bought in at 17.7 cents on 27 June 2016, which I vaguely remember as the day Brexit occurred. I figured if it did not drop at such a dramatic event, surely it will grow when things got better. As my buy-in capital is small, I am not very tempted to take profit at current price. I hate to write this post as I do not want to jinx it (things are still going well) but in the spirit of sharing and also in the spirit of not being accused of hindsight-predicting, I have decided to write this post in the end.

NOTE: This post is not to comply you to buy the above-mentioned stock. Notice the price has actually gone up. Do your own due diligence before you take any action. To make sure you do indeed do your homework.... yes if you buy, you are helping me to prop up the share price!!


Cheers

Gordon Growth Model on Singapore Post (S08.SI)

Singapore Post (S08.SI) is Singapore's postal service provider for over 150 years. To combat the trend of declining mail volume, the company had been diversifying into e-Commerce business. This was done primarily through acquisition of e-Commerce related companies like TradeGlobal and logistics provider like Jagged Peak.

Currently at a closing price of $1.80, Singapore Post has a market capitalisation of $3.88B and annual dividend of 7 cents. In this post, we shall attempt to gauge what is an appropriate valuation of Singpost using one of the valuation methods I learnt in school.

Gordon Growth Model

In earlier posts I used to value stocks, I projected EPS growth and applied suitable P/E to arrive at a value expected in the future. A new method I've actually learnt in my finance class in school is actually the Gordon Growth Model. Basically in the model, the intrinsic value of an asset is determined by the size and timing of all future cash flows, discounted to the present value using the asset's required rate of return. 

Hence, for a stock valuation, the future dividends of the stocks are discounted to the present to get the estimated stock price it should be today. 

Using Gordon Growth Model, the formula for a firm paying constant dividends is: 

Share Price = Constant Dividend / Discount Rate

Another scenario which a firm paying a constant dividend growth, and the equation is:

Share Price = Expected Dividend in a Year's Time / (Discount Rate - Expected Dividend Growth)

The Discount Rate we are talking about here is actually gotten using the Capital Asset Pricing Model (CAPM) and the equation goes like this:

Discount Rate = Risk-free Rate + Beta (Market's Rate of Return - Risk-free Rate)

Now we can start hunting values to fit into the CAPM equation. For risk-free rate, we can refer to the yield of Singapore's 10-year government bond, which currently stands at 2.47%. For market's return, we can refer to returns generated by STI ETF since inception in April 2002. The total annual return inclusive of reinvested dividend is 7.21%. Beta of Singapore Post can be found in Reuters and it is at 0.52. Substitute them all into the CAPM equation and the discount rate equals to 4.93%.

Which Dividend Model and Value?

To be conservative, the constant dividend model should be chosen. This is based on the dividend history where SingPost maintained a constant 6.25 cents dividend for 8 straight years. With the recent dividend at 7 cents combined with a discount rate of 4.93% = 0.0493, the expected share price actually comes up to $1.42. This is a far cry from the current $1.80. 

However, if you are actually optimistic about the dividends from Singpost, you can try estimating the share price using the dividend growth model. Since dividend did actually grow by 12% after 8 years, one can conservatively approximate that dividend grow by 1% annually. Using the constant dividend growth formula, the share price will increase to $1.80. This is practically the current price. 

Based on these two sets of share prices, one can conclude that SingPost is actually overpriced to fairly priced. In my opinion, with SingPost's acquisition spree recently, it is safer to guide for constant dividend since cash flow will be tighter.