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Saturday, December 31, 2005

Technics @ 29.5 cts ( Oil services / Singapore ) 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.Patchy track record

2.Small scale limits its bidding competitiveness vs bigger rivals

3.Questionable placement mechanics

This is my second successive oil and gas stock which I am calling for a "not to buy" but let me assure you that the reasons for doing so are vastly different. For SPC it was because of surprisingly weak Asian refining margins that I advised against investing in the stock. As for the oil and gas services industry which Technics is in, it is poised to see increasing business and margins for 2006 due to high oil prices; however one will have to be selective and invest in companies with good track records in lean years to manage the downside risk.

Imagine a company which has been making losses in two out of the past three years, didn't declare any dividend in the most recent year when it made a turnaround profit, and is now trading at 19X trailing PE and nearly 4X NTA. Does it make sense to buy into it on the promise of rising profit margins alone?

It might if the company has substantial scale and had an established track record before it fell on bad times, for then there would be a base from which to rebuild, an assurance of quality and of critical mass. Some might argue that there is more upside to micro-caps and that is true, but unless the company has strong barriers to entry (eg. Sarin's technological strengths and niche expertise) the company is more liable to have its lunch eaten up by larger competitors. I would argue that it is more so in capital projects engineering where there is little proprietary technology and what matters is past project experience, global network and access to vast amounts of working capital (for income streams only dribble through as successive milestones are reached). With a revenue base of about S$20M for the past few years and with total assets of ~S$20M, Technics hardly looks like a credible bidder for larger projects which typically offer higher margins.

Amidst the hullabaloo created by the property sector in the later half of 2005, some oil services firms have had a silent bull charge: Rotary has gone up from 35 to 53, Tat Hong from 40 to 67, Federal from 23 to 38. Technics has gone up from about 16 cents in the middle of the year to 29.5 cents on 31 Dec, a near two-bagger. I would identify the bull factors for its rise as follows: optimistic outlook on the sector, turnaround in its profits from -3.5M in FY04 to 2M in FY05, a strong S$38M order book, and new capacity in its Singapore and Batam yards. Well, a larger reported $44M order book as at mid-2004 did not prevent the company from recording a loss for that year, for the record. Capacity expansion was completed in July 2004 so why did revenue base only grow by ~10% from FY04 to FY05?

The company had just issued a placement of 13M new shares at 18 cents in mid-September and I am hard-pressed to find a rationale for it selling a part of itself at this basement price if its shares are worth 60% more 3 months later, on high volume some more. Three possible reasons. Firstly, that it believes 18 cents is a reasonable price, in which case investors would be silly to buy at 30 cents just a while later. Secondly, that it has strong needs for funds, which is possible looking at its high payables of ~$10M compared with available cash of $5M (and that was after raising its $2M in the placement); the question then surfaces, however, as to why they did not borrow at low interest rates instead of raising equity? Furthermore, if the company needs $2M so desperately, does it make sense to invest? The third possible reason for the placement is that it is a placement to strategic shareholders. That is however unlikely, for if so the company would have trumpeted the fact publicly already.

Given these doubts, I would not put my money in at anything above 20 cents into the company. Otherwise, you might just be buying from the buyers of the placement at 18 cents.

May all of us have a prosperous 2006!




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