GSS Energy – Personal view from technical and fundamental aspects (6 Oct 17)
- Original Post from ERNEST LIM'S INVESTING BLOG

In my technical write-up on GSS Energy (“GSS”) dated 14 Sep 2017 (click HERE), I highlighted the possibility that GSS may be on the verge of forming a potential inverse head and shoulder formation. For this write-up, I have put in my personal view based on both technical and fundamental aspects.
Read below for more.
 
Technical outlook – bullish
Why do I feel the chart looks positive?
a) Previously, in my earlier technical write-up, I mentioned that a breach above $0.157 with volume and on a sustained basis points to an eventual measured technical target of around $0.186. GSS has been hovering around in an extremely tight range between $0.159 – 0.164 for the past eight trading sessions. Furthermore, since 31 Aug 2017, the increase in price is typically accompanied with higher than the 30-day average volume. Therefore, in my opinion, the bullish inverse head and shoulder formation is confirmed and this points to an eventual measured technical target of around $0.186;
b) ADX closed 24.2 amid positively placed DIs. This is indicative of a trend;
c) All the exponential moving averages (“EMAs”) are rising higher pointing to an uptrend. 20D EMA has formed golden crosses with 50D EMA and 100D EMA. These add more confidence to the strength of the uptrend;
d) Indicators such as OBV and MACD have strengthened.
Near term supports: $0.159 / 0.157 / 0.154
Near term resistances: $0.163 – 0.165 / 0.172 / 0.181 – 0.182
It is noteworthy that a sustained break below $0.155 with volume signifies that the inverse head and shoulder formation may have failed.
Chart 1: Bullish inverse head and shoulder formation confirmed

Source: Chartnexus 6 Oct 2017
 
Fundamental aspect
a) GSS’ share price performance lags behind peers
Since 25 Sep 2017 (this date was chosen, as most tech stocks hit an intraday low at that time. It also coincided with the intraday low hit by Nasdaq), based on Table 1 below, the technology stocks have moved up an average of 10%, led by Valuetronics and Hi-P. By this measure, GSS seems to have lagged in terms of share price performance with a 5% gain.
b) Trades at a substantial discount to peers
It is also noteworthy that the sector average for FY17F PE is around 14.5x. With reference to my write-up dated 18 Aug 2017 (see HERE), if I work on a general assumption that GSS’ 2HFY17F constitutes about 60% of FY17F PE’s core net profit, GSS is trading at around *8.0x core annualised FY17F PE. (It is noteworthy that 2HFY16 core PE net profit was around S$7.9m vs 1HFY16 core PE net profit of around S$2.5m). In other words, GSS trades at a substantial discount to its sector. Furthermore, it is noteworthy that GSS is a net cash company with approximately S$8.2m cash and negligible borrowings.
*The above is based on a back of the envelope calculation. As I am not an equity analyst, the above is purely my guesstimate and may not be accurate.
Table 1: How GSS fared against other tech stocks since 25 Sep 2017

Source: Bloomberg and Ernest’s compilations 6 Oct 2017
 
Risks
As with (almost all) investments, there are risks involved in investments, especially into small mid cap stocks such as GSS. Such risks have been highlighted before in my earlier write-ups. For GSS, the two events which investors are likely to be watching out for in the near term are:
a) Update on oil production
The largest unknown is whether GSS will hit first oil in the next few months. This is anybody’s guess. However, I guess management is quietly confident as Sydney, GSS’ CEO has been aggressively accumulating shares from Jan 2017 – Apr 2017 with the latest purchase price at $0.175. It is noteworthy if there is no oil, regardless of how undervalued its engineering business is, GSS is likely to face some sort of sell-off.
b) Upcoming 3QFY17F results
Investors will know it when GSS announces 3QFY17F results around mid Nov.
 
Conclusion
The above is based on my personal observation on GSS’ chart. Readers are advised to refer to GSS’ website HERE and SGX website for more information. There are always risks involved in trading. Please do your research and form your independent opinion.$GSS Energy(41F.SI)
P.S: I am vested.
 
Disclaimer
Please refer to the disclaimer HERE

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GSS Energy dived 31% since 29 Mar 17. What gives? (18 Aug 17)
- Original Post from ERNEST LIM'S INVESTING BLOG

$GSS Energy(41F.SI) Since my write-up on GSS Energy (“GSS”) dated 28 Nov 2016 (see HERE), GSS’ share price has surged 154% from $0.078 on 28 Nov 2016 to an intraday high of $0.198 on 29 Mar 2017. It has subsequently dived 31% to close $0.137 on 18 Aug 2017. For chartists who monitor GSS, they would have noted that GSS has broken its 4-month trading range of (approximate) $0.152 – 0.181 which is a bearish development.
In this write-up, I will structure it differently. To attempt to explain the price fall, I will discuss what has changed and what has not changed for GSS. However, I hasten to add that this is entirely based on my personal opinion / view. Some things highlighted below may have possibly changed without my knowledge.
 
What has changed?
Based on my personal observation, three things have changed which may have contributed to the fall in GSS’ share price.
1. Recent weakness in small mid cap oil stocks
Although oil prices are still trading around US$47 / barrel, our Singapore small mid cap oil stocks have fallen with the suspension of Ezion, (touted to be one of the most resilient small mid cap oil stocks by some analysts). For example, Mermaid and Ausgroup have slid around 15% and 6% respectively since 8 Aug 2017 (the last day which Ezion traded.)
2. Recent profit taking in technology stocks
Technology stocks such as AEM, Memtech, Venture have slipped 5 – 17 % from their recent highs. Coupled with point 1 above, this may put some selling pressure on GSS, as it has two business segments, viz. precision engineering (“PE”) business and oil business.
3. Chart break
In addition to the aforementioned points, GSS’ bearish chart breakdown from its 4-month trading range $0.152 – 0.181 casts a pallor to its share price. (see Chart 1 below) 100D, 50D and 20D exponential moving averages (“EMAs”) are turning down with death cross formed between 20D and 50D EMA. ADX is 33, amid negatively placed DIs which is indicative of a trend. At the time of writing, GSS has slipped below its 200D EMA at around $0.141. In order to be less bearish, it should regain $0.141 in the next few days.
Notwithstanding the above bearish factors, there are two potential positive factors. Firstly, there seems to be a bullish hammer formation on 18 Aug 2017. Hammer formation is a bullish reversal pattern that follows after a steep decline but it requires confirmation. Confirmation can be either in the form of a long green candle, or a gap up with volume expansion. Thus, we have to assess whether GSS moves up in the next few days. Secondly, RSI has slipped to oversold level of around 23 which is the lowest last seen on 28 Dec 2015.
Near term supports: $0.134 / 0.130 / 0.128
Near term resistances: $0.138 / 0.141 / 0.149
Chart 1: A potential bullish hammer formation

Source: Chartnexus 18 Aug 2017
 
What has NOT changed?
1. First oil imminent –> likely to be in the next few months
Based on GSS’ latest results released on 14 Aug 2017, GSS stated that the preparations to commence production drilling in Trembul Operation Area are well advanced. With reference to an article on Jakarta Post dated 24 Jun 2017 (click HERE), GSS may commence drilling this month and start oil production in Sep.
2. PE business going strong
1HFY17 PE revenue and net profit rose 27% and 57% respectively on a year on year basis to S$44.7m and *S$3.9m respectively. This arose as its PE business continues to win more orders from existing and new customers. GSS has moved to its new China factory this month and expects this new facility to increase its production scale, manufacturing capabilities and enhance cost and production efficiency. Management emphasised that they have stocked up inventory for this transition thus, the transition from the old facility to the new China factory is seamless and does not result in any loss of production capacity.
As with the other technology stocks, it is likely that 2HFY17F is stronger than 1HFY17 due to seasonal factors.
*Do note S$3.9m was the net profit for PE business, before it was set off against the O&G and corporate expenses.
3. PE business trading at discount against peers
If I work on a general assumption that 2HFY17F constitutes about 60% of FY17F PE’s core net profit, GSS is trading at around 7.0x core annualised FY17F PE. (It is noteworthy that 2HFY16 core PE net profit was around S$7.9m vs 1HFY16 core PE net profit of around S$2.5m).
Simplistically speaking, GSS trades at a substantial discount to its sector as the FY17F PE sector average is around 10x. Furthermore, it is noteworthy that GSS is a net cash company with approximately S$8.2m cash and negligible borrowings.
**The above is based on a back of the envelope calculation. As I am not an equity analyst, the above is purely my guesstimate and may not be accurate.
4. Market continues to price its oil business with zero value
If the above assumption that GSS’ PE business is trading at a substantial discount against its peers is true, then it stands to reason that the market is not pricing its potential up and coming oil business (Trembul Operation Area) with any value. Although I do understand that the investment community may be waiting for GSS to deliver on its oil business, before it ascribes any value to this segment, I think this segment should warrant some value too, as presence of oil is corroborated by historical data. According to the same article on Jakarta Post dated 24 Jun 2017, Nederlandsche Koloniale Petroleum Mij (NKPM), a subsidiary of Standard Oil Company of New Jersey, now ExxonMobil, initially explored the Trembul Operation Area and drilled around 307,000 barrels in 1917. The area reportedly has around 40.1m barrels of oil reserve. (Please refer to my earlier articles on GSS and GSS’ announcements on SGX for more details)
 
Risks
As usual, there are always risks involved, especially in small cap stocks with business operations in Indonesia. I wish to emphasise the following risks which have been mostly highlighted in my past write-ups.
1. Execution risk
It is noteworthy that this is the first time that GSS is operating this KSO contract. Notwithstanding that GSS has employed highly capable personnel in their oil and gas department, there may still be execution risks.
2. Country specific risk
For those who have followed companies operating in Indonesia, you may be aware that there are things beyond the companies’ control, especially on project timeline.
 3. First oil is not 100% guarantee
Although there is historical data to corroborate the presence of oil in the area, it does not mean that GSS may necessarily strike oil. Failure to strike oil, or a lack of news flow in this segment in the next few months may spark another round of sell-off.
 
Conclusion
Given the above factors, GSS’ share price may recover from the recent bout of selling if it continues to deliver on its results and its oil production in the next few months. Readers may like to take note that Sydney, GSS’ CEO, last bought 1.4m GSS shares @$0.175 on 12 Apr 2017. GSS is planning to host its results briefing on 28 Aug 2017 and we may have more updates.
Readers should refer to GSS website HERE and SGX website for more information.
P.S: I am vested and have informed my clients on Fri (18 Aug) morning.
 
Disclaimer
Please refer to the disclaimer HERE

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GSS Energy spiked 67% since 1 Sep 2016! What gives? (10 Oct 16)
- Original Post from ERNEST LIM'S INVESTING BLOG

$GSS Energy(41F) GSS Energy’s (“GSS”) recent share spike and chart action caught my attention. GSS has surged 67% from $0.048 on 1 Sep 2016 to close $0.080 on 10 Oct 2016. It has just moved above its 200D exponential moving average (“EMA”) for the first time in 16 months! Furthermore, GSS announced that its subsidiary was awarded a KSO contract from Pertamina for oil production for the Trembul Operation Area. In view of the chart and company’s developments, I arranged a meetup with Mr Sydney Yeung, CEO of GSS Energy for an exclusive discussion of the company’s business developments and prospects.
Below are the key takeaways from the meetup.
 
1. KSO contract differs significantly from their previous old well contracts
Some important differences are as follows:
a) Low probability of the contract being cancelled
Previously, the old well contract which GSS had, was suddenly terminated on 16 Jul 2015. This was because Pertamina terminated the contract with the local cooperative, KUD. As a result, KUD does not require the GSS’ services (i.e. GSS is akin to a subcontractor in this contract). Since then, GSS learnt from their previous experience and made a few significant changes in this latest contract.
Firstly, Pertamina awarded the KSO contract directly to GSS’ subsidiary PT Sarana GSS Trembul (“PT SGT”). Secondly, PT SGT is a joint venture between GSS Energy and PT Sarana Pembangunan Jawa Tengah (“PT SPJT”), a commercial vehicle wholly-owned by the Provincial Government of Central Java which holds stakes in various large-scale infrastructure projects in Indonesia. Thus, this joint venture is quasi state-owned to a certain extent. With the backing of Provincial Government of Central Java, it is less likely for the contract to be cancelled.
b) Funds will be paid directly to GSS
It is noteworthy that under the old well program, GSS produces oil and delivers to KUD. KUD then sells to Pertamina and Pertamina pays to KUD. KUD has to pay back GSS before GSS can receive any cash. Thus, there are multiple layers involved and collection is likely to be slower and less certain. However, with this KSO contract, GSS PT SGT will sell to Pertamina and Pertamina pays PT SGT directly.
c) Cost recovery model
In a simplistic manner, KSO contract works on a cost recovery model. This means that for the sale proceeds which GSS gets from the sale of oil, the proceeds will be used to offset against the capital expenditure required in drilling oil. Any excess will be split in a pre-determined manner between Pertamina and GSS.
 
2. Low cost of oil production
According to management, its cost of oil production is around the region of low teens. The cost of production is low due in part to the following factors:
a) Onshore drilling, initially target up to 800m;
b) Rig operators are charging lower rates due to depressed oil prices and lack of business;
c) Trembul area has good logistic facilities which result in lower logistic costs incurred.
 
3. High probability of oil production
ExxonMobil has their largest onshore oil field production in the Trembul Operation Area. Notwithstanding the inherent risks of oilfield operation and production, management is optimistic that the Trembul Operation Area which they are drilling has oil because
a) ExxonMobil’s oil production is in close proximity to GSS
In terms of oil production, ExxonMobil produces about 180K barrels / day and it targets to increase to 240K barrels / day. As ExxonMobil’s site is in close proximity to GSS, it is likely that GSS site should be able to produce oil too.
b) Old well data corroborates management’s optimism
According to a Qualified Person’s Report (QPR) conducted, Trembul area has a net substantial 24.32 million stock tank barrels of high estimate Contingent Resources up to the depth of 800 metres. Potential reserves beyond 800 metres depth has not been estimated yet. With this QPR, it corroborates management’s optimism that there is a high probability of oil production.
 
4. Value of Trembul oil fields
GSS mentioned that the Trembul area has a net substantial 24.32 million stock tank barrels of high estimate Contingent Resources up to the depth of 800 metres. What does this mean for the retail investor and what is the value of Trembul oil fields?
Management shared the following simple calculation based on extremely simplistic assumptions.
Indicative value of the Trembul area = [(24.32m) x ((10-15%)*US$50)] x 60% = US$73m
A few noteworthy points on the above calculation
a) (10-15%) x the oil price which is around US$50 now: Whether it is 10% or 15% or a figure in between 10-15% of the oil price is subject to negotiation;
b) I multiply by 60% so as to be prudent;
c) 24.32m stock tank barrels only covers a small percentage of the entire Trembul area which GSS is allowed to work on. Furthermore, 24.32m stock tank barrels is an estimate for depth up to 800m. Theoretically, GSS can and is likely to drill deeper. If GSS drills deeper and / or covers more area of the Trembul area, there is a likelihood that they may hit more oil which will further raise the amount of oil resources.
 
5. Cash call to finance initial oil drilling – unlikely at this time
Based on 1HFY16 results, GSS is sitting on a net cash position of S$15m. Based on their existing estimates, it is unlikely that it has to do a cash call, unless they intend to expand their oil production aggressively. GSS expects to commence oil production by 1HFY17.
 
6. Robust engineering business – sustainable performance ahead
Precision Engineering (“PE”) business has been doing fairly well this year. Furthermore, GSS was awarded a significant order to produce game consoles for an established game console player which is expected to commence production late this year. Thus, it is likely that PE business should be fairly sustainable in the next couple of years. In addition, as GSS relocates into their new factory in Changzhou in 1HFY17F, it will do more active marketing for their PE business with their expanded production capacity.
 
Valuation
It is noteworthy that GSS’ market capitalisation is only around S$40m as of 10 Oct 2016 vis-a-vis the extremely simplistic indicative value of the Trembul area of around S$100m (US$73m equivalent). In addition, it is noteworthy that GSS has approximately S$15m of net cash and its PE business registered S$7.6m of core earnings last year.
 
Chart analysis
Based on Chart 1 below, GSS has largely traded between the range of $0.050 – 0.085 since Dec 2015. Amid positive placed DIs, ADX is trending higher and closed at 27, indicative of a trend. 21D, 50D and 100D EMAs are moving higher with golden crosses formed between 21D and 50D; 21D and 100D and 50D and 100D. 200D EMA has stopped declining and GSS has closed above its 200D consecutively for the past three days, which is a feat, not seen in the past 16 months!
Based on my personal view, there seems to be a bullish tinge in the chart setup. It is likely that odds are higher of an eventual break above $0.085. A sustained break above $0.085 / below $0.050 with volume points to an eventual measured technical target of $0.120 / 0.015.
Near term supports: $0.075 / 0.071 – 0.073 / 0.064 – 0.065
Near term resistances: $0.085 / 0.089 / 0.094
Chart 3: GSS range trade between $0.050 – 0.085 since Dec 2015

Source: Chartnexus chart as of 10 Oct 2016
P.S: I have highlighted to my clients to take a look at GSS when it was trading around $0.05 – 0.06 approximately 2-3 months ago. 
 
Conclusion
The recent KSO contract with Pertamina seems to be a game changer for GSS’ oil business division. Coupled with its thriving PE business and the bullish chart setup, this is an interesting company to take a closer look. However, readers should note the usual risks such as illiquidity; execution risk in the oil business division and the risks involved in doing business in Indonesia.
The above summarises the key takeaways from my meeting with Sydney, GSS Energy CEO. Readers should take a look at GSS Energy website HERE for more information.
 
Disclaimer
Please refer to the disclaimer HERE

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