SIG GAS INDUSTRIES BHD FUNDAMENTAL WRITE-UP

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Company Profile

SIG GASES BERHAD ANALYSIS on FY2013 annual report + taking in FY2014 Q2 result

	Ann FY2014	YTD Q2 FY2014	2013	2012	2011	2010	2009
Revenue	65,634	32,817	63,109	62,131	54,361	55,261	54,568
Gross Profit	21,052	10,526	18,609	16,994	15,593	18,863	19,276
EBITA	10,520	5,260	9,558	8,313	8,128	12,407	13,274
PBT	4,572	2,286	1,956	2,187	3,512	7,941	9,392
PAT	9,832	4,916	2,653	3,287	2,434	6,005	7,112
Depreciation	5,454	2,727	5,363	4,554	3,745	3,303	2,779
Capital Expenditure	3,914	1,957	5,996	20,373	20,563	10,764	11,201
PPE	107,305	108,845	109,636	116,207	95,167	76,784	68,927
CASH	4,311	4,311	7,711	6,472	11,176	15,885	1,381
LT bank borrowings	9,474	9,474	12,829	17,277	10,488	5,795	11,581
ST bank Borrowings	24,874	24,874	24,131	16,571	10,302	7,157	8,518
Total Bank Borrowings	34,348	34,348	36,959	33,848	20,790	12,952	20,099
Equity	101,004	96,088	92,072	90,619	84,790	84,306	52,152
Deferred tax liabilities	4,305	4,305	6,949	7,920	9,078	7,872	6,246

SUMMARY

I am long on this counter at RM 0.71, Fundamental analysis justification as below, why I committed money in to this counter.

1. Net income in FYE 31st Dec 2014 is expected to record MYR9m – 9.6m (base on the q2 annualized numbers) vs MYR2.6m in previous FY..
2. SIGGAS revenue stream derived from 3 areas.
1.  Core business, (gas mfg and distribution). YTD Q2 FY2014 = MYR10.5m vs MYR8.8m in previous corresponding quarter FY 
2. Investment in Iwatani- SIG yielded MYR393K vs losses MYR24k.
3. Other Income – MYR525K vs MYR792K
3. Confidence in SIGGAS achieving annualized net income in the region of MYR9 – 9.6m are are based on the following :
1. Last 5 quarters earnings (since 30th Jun 2013) posted improvement in gross margin. In my opinion it is sustainable as the company’s large investment in CAPEX have yet translate to substantial growth in earnings.
2. Iwatani – SIG, operational in FY2013 generated MYR393k in first 2Q in FY2014 vs MYR169K in the entire FYE2013. Another gas plant to be ready by 31st Dec 2014. Returns expected to grow tremendously and contribute to SIGGAS bottom line.
3. Other Income – indicated steady income, though experience slight decline compared to previous FY.
4.  Benefited from reversal of tax credit as of YTD Q2 FY2014, had reversed MYR2.6m, though this is not a constant income stream hence its benefit will taper off after FY2015.

IN DEPTH ANALYSIS

EXPECTED FYE 31ST DEC 2014 NET INCOME

1. Reference to the annualized numbers SIGGAS full year net profit should be in the region of MYR7.2m – MYR9.6m.
2. (Core Business = MYR2.74m) + (Iwatani-SIG = MYR786K) + (Other Income = MYR1.05m) + (Tax credit = MYR4.0m *the number may vary depends on how much tax credit in Q3 & q4)
3. SIGGAS current P/E at 15.6x annualizing SIGGAS 31st Dec 2014 net income at MYR9.6m, P/E = 10.83x (Reference Price =  MYR0.71)  
4. Closest comparison = B.I.G. Industries is current P/E at 15.7x while its annualized P/E at 15.78x  (Reference price = MYR0.76)
5. Best guess on SIGGAS expected share price - Assuming SIGGAS will be trading at 14x P/E, SIGGAS expected share price should be at MYR0.92 once Q4 results are available and remain on track. (Please note this is an assumption that SIGGAS will remain traded in the region 14x P/E.

PROFITABILITY

1. Over the last 5years SIGGAS invested over MYR68m in CAPEX, however the investment in CAPEX had come down substantially in FYE2013 as well as Q2 FY2014, this may implied that SIGGAS high CAPEX years are over. It is likely to see more profitability.
2. In FYE2011, gross profit margin dropped to 28.6% from 34% result in gross profit plunged by 17% in FYE2011 and in tandem net profit suffered 59% decline in that year. 
3. It seems that lower gross profit margin bottom out in FYE2012 recovery is evident in FYE2013 and recovery remain intact in the first two quarters in FY2014 which saw the gross profit margin at 32%.
4. In FY2013 every MYR1 in PPE it generates MYR0.58 sales, much lower than in 2009 where PPE generates MYR0.79 sales, meanwhile sales in FYE2013m grew around 20% compared to FYE2011, despite heavy CAPEX investment
5. This implies that SIGGAS production efficiency is climbing and will continue to climb due to high CAPEX investment over the years or there are still a lot of capacity to generate more sales revenue.

LIQUIDITY

1. SIGGAS Liquidity is a concern where its short term bank borrowing stood at 3x against its liquid asset (CASH + INVENTORY).
2. Gearing continue to rise over the years due to heavy CAPEX investment, however with FYE2013 and first 2 quarters in FY2014 it seems that CAPEX investment had peaked and will continue to dwindle, this will put less strain on liquidity.
3. Liquidity may be a concern, however with SIGGAS’s more than MYR100m in PPE, they have an option to use their PPE as collateral to secure more bank borrowing to meet short term liquidity.
4. Rights issue will raise MYR13.5m, that will be sufficient to balance out the illiquidity in current assets vs current liabilities (namely cash vs short term bank borrowings)  

SIGGAS RIGHTS ISSUE

1. Announcement to issue 37,500,000 new shares @ MYR0.50 on 5th Sep 2014, at the point of announcement SIGGAS was traded at MYR0.70 this implies a 28% discount to the market price.
2. Since the subscription price is determined @ MYR0.50, hence it is unlikely to push the price higher for higher rights price.
3. Subscribers need only to pay MYR0.36 as MYR0.14 will be paid from share premium account. 
4. Paying from share premium account allows the company to unlock the value up to MYR5.25m. I understand share premium money cannot be used unless it is for equity related exercises by paying on behalf of the shareholders the company can utilize the monies for the operating activities.

INCOME STATEMENT

SIGGAS income has 3 main components and these are 

1. Core business (manufacturing/refill/distribute gas) – FYE2013 = MYR18.6m 
2. Returns from their investment in Iwatani-SIG (40% stake) – FYE2013 = MYR169k
3. Other Income – FYE2013 = MYR1.1m (1 off disposal of PPE account for MYR506K)

CORE BUSINESS

1. YTD revenue in Q2 FY2014 recorded at MYR32.8m, an annualized figure would arrive at MYR65.6m estimated around 4% growth. Since revenue in FY2014 growth is not too substantial, not expected substantial growth from increase of sales.
2. On gross profit margin (gross profit ÷ revenue), there is an increase around 2.5%. Reference to high gross profit margin, expected FY2014 gross income at MYR21m vs MYR18.6m in FYE2013
3. Expenses in Q2   FY2014 amounts to MYR9.15m (SGA + Finance cost), annualized expenses = MYR18.3m
4. Income from core business in FY2014 (using annualized numbers) = MYR2.74m vs MYR635.4K. That’s equals to 430% growth.

IWATANI-SIG (40% stake)

1. Iwatani was a JV between SIG and Iwatani formed in mid 2012. 
2. Net return in FYE2012 = -MYR25.9K (losses) and FYE2013 = MYR169K (gain)
3. In Q2 FY2014 recorded returns = MYR393K
4. Annualized Income = MYR786K (should be higher and likely in the region of MYR1.0m) vs MYR169K. That’s equals to 465% increase.
5. Income from Iwatani-SIG expect to grow substantially in FY2015 onwards in view of a new gas plant to be completed in end of 2014. Refer to below link

http://www.thestar.com.my/News/Community/2014/04/27/Expectation-of-growing-demand-IwataniSIG-to-pump-RM13mil-into-new-air-separation-unit-at-Samalaju-I/

OTHER INCOME

1. Not much to analyze here, income return expected to be stagnant since insufficient information available.
2. In Q2 FY2014 recorded returns =MYR525K compared to MYR792K in preceding year’s Q2.
3. Annualize income = MYR1.05m

REVERSAL OF DEFFERED TAX = TAX CREDIT

1. Since FY2012, the company enjoys tax credit, FYE2012 =MYR1.1m FYE 2013 =MYR627K
2. In Q2 FY2014, total tax credit   = MYR2.63m, while in Q2 remaining deferred tax liabilities has MYR4.3m.
3. Total tax credit reversal in Q3 & Q4 should not exceed MYR4.3m.
4. Assuming the trend continues, FY2014 total tax credit is expected in the region of MYR4.0m.
5. Once deferred tax liabilities are fully refunded, SIG-GAS will not enjoy further tax credit hence in FY2015, tax credit should not exceed MYR2m-3m (depends on how much is realized in FY2014)

ESTIMATED FY2014 income 

1. Reference to the annualized numbers SIGGAS full year net profit should be in the region of MYR7.2m – MYR9m.
2. (Core Business = MYR2.74m) + (Iwatani-SIG = MYR786K) + (Other Income = MYR1.05m) + (Tax credit = MYR4.0m *the number may vary depends on how much tax credit in Q3 & q4)

BALANCE SHEET

1. Balance sheet in FY2014 is not expected to grow substantially, based on Q2 FY2014 condensed balance sheet.
2. It is noteworthy that the company has MYR116.2m in non-current assets while its equity = MYR96m. This imply part of the non-current assets are financed by liabilities.
3. Total bank borrowings in Q2 FY2014 = MYR34.3m of which only MYR9.4m are non-current borrowings. There is around MYR10m funded by short term borrowings.
4. SIGGAS liquidity is a concern as its current borrowings = MYR24.8m while its available liquid assets = MYR8.7m (Cash + inventory).
5. Capital expenditure in between 2009 to 2013 totaled to MYR68.89m and the capex in FY2013, dropped to low of MYR6.0m from high over MYR20m. 
6. Cash reserve dwindled to MYR4.3m in Q2 FY2014 and liquidity is very tight with Short term borrowing almost 3x the size of inventory and cash balance combined.

Structure Of assets and liabilities

ASSET STRUCTURE

1. Total Assets in FYE2013 expanded by 16% to MYR156.14m while in Q2 FY2014 total assets remained relatively unchanged.
2. Non-current assets account for 73% of the total assets of which mainly made up of PPE (MYR109m) and investments in associates (MYR4m). In Q2 FY2014 increase by MYR1.6m mainly derived from investment in associates.
3. Current assets mainly comprised of trade receivables, inventories and cash balances. It is worth to note inventory property recorded at MYR2.3m are to be completed/completed factories in Bintulu which are to be sold. The figure is likely recorded at book value, hence expect more upside if it is sold. 

LIABILITIES & EQUITY 

1. Equity accounts for 59% (MYR92m) of the total assets, of which share capital account for MYR75m. In Q2 FY2014, equity increase to MYR96m.
2. Current liabilities account for MYR44.3m while non-current liabilities totaled to MYR19.77m.
3. Total short term and long term bank borrowings = MYR24.1m MYR12.8m = MYR36.96m. In Q2 FY2014, borrowings decreased to MYR34.3m
4. Interestingly the company deferred tax liability stood at MYR6.9m in FY2013 while in Q2 FY2014, it had been reduced to MYR4.3m. The tax credit combination of overprovision in previous FY and tax credit from reinvestment allowance. 

NETWORTH

1. Shareholders fund at MYR92m are mainly made up of share capital (MYR75m) remainder are share premium reserves MYR6.4m and retained earnings at MYR10.9m. In Q2 FY2014, equity increased (by MYR4m) to MYR96m mainly from retained earnings.

FINANCIAL RATIOS ANALYSIS

 Net Profit Margin: 

1. SIGGAS on the back of MYR63m recorded net profit of MYR2.63m in FYE2013, 19% decline from FYE2012. 
2. YTD Q2 FY2014, recorded MYR4.9m net profit, while the annualized figure expected in the region of MYR7m – MYR9m.
3. In FYE2013, gross profit margin improved to 29% from 27 in FYE2012, while YTD Q2 FY2014 recorded 32%. 
4. Omitting tax credit actual net profit in FYE2013 = MYR1.95m and YTD Q2 FYE2014 =MYR2.3m. Annualized FY 2014 net profit will be at MYR4.55m (exclude tax credit).

Return on Equity:  Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. 

1. Return on Equity (ROE) was at 2.9% in FYE2013 while in FYE2012 was at 3.6%. 
2. Better returns in core business, iwatani-sig and tax credits saw the ROE increased to 13.4% in first 2 quarters of FY2014.
3. ROE in full FY2014 expected to be in the region of 18%-21%
4. SIGGAS ROE is unremarkable, unless the trend that income from its core business and investment in iwatani-sig continue to grow, the company will have very low ROE.

Return on Asset (ROA):  A ratio widely used to evaluate a company's operational efficiency that indicates how profitable the company is relative to its assets 

1. FYE 2013, ROA at 1.17% while in YTD Q2 FY 2014 = 2.3%, expect the full year ROA in the region of 4%.
2. Extremely low in ROA, its assets are not generating enough income.

LIQUIDITY RATIO
Current ratio:  A liquidity ratio that measures a company's ability to pay short-term obligations. As a benchmark, any ratio above 1 indicates pretty good liquidity. 

1. Current ratio at 0.93x barely below the optimum level.
2. Acid test ratio (omitted inventory) at 0.64x.
3. It is to be noted that short term borrowings at MYR24m is 3x the size of other liquid assets.
4. Negative working capital of MYR6.3m further imply liquidity tightness.

Solvency ratio:  The ratios used to measure a company's ability to meet long-term obligations. Generally the benchmark is 20% above which is consider financial healthy.

1. Estimated FY2014 income + depreciation = MYR9.9m while total liabilities MYR60m. Solvency at 16.5%

Net working capital:  Measures the financial health. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory).

1. Working capital shortfall amounts to MYR6.3m. 
2. Cash in bank account for 2.7% (MYR4.3) of total assets.

RESEARCHED BY K H WONG

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