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Wednesday, September 06, 2006

Federal @ 49 cts ( Oil services / Singapore ) 0 comments

Final Poll Results: 2:1

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

Main issues

1.Exit of strategic investors that originally fuelled investors' hopes

2.Insipid track record

Consider the tale of Federal International. In mid-August 2006 it announced a splendid set of half-year results where revenue almost doubled while net profit jumped 150% year-on-year. This seems to justify its trailing PE which is >20X because if we extrapolate 1H06 performance to the full year, it suggests forward PE could be as low as single-digit.

Perhaps, perhaps. Let's look at the history of the stock starting from December 2005 to get a perspective. In early Dec 05 Federal was trading at ~30 cents with lethargic volume, and a look at its performance over FY04 gave little cause for great optimism: near-zero net profit growth over FY03, revenue drop (margins did increase though), 1H05 net profit growth was mainly due to a turnaround by a previously loss-making associate without which operating profit had dropped by half. As a matter of fact, it transpired that FY05 results continued in the same vein, with full-year revenue dropping yet again while profit remained stagnant.

In December 2005 the price catalyst came. Two Indonesian investors, hailed as strategic investors by the company, subscribed for a total of 42M shares at $0.33 in the group: Syailendra Bakrie and Nancy Latief were the proxies for Indra Bakrie and Rennier Latief respectively, both individuals with oil and gas influences in Indonesia. In January and February Syailendra Bakrie continued adding to his stake, and Federal's price rose to >70 cents --- a >twofold increase --- on optimism surrounding the Indonesian contacts the new investors would bring.

Some big new deals did come. In January 2006 Federal clinched a US$24M contract to provide integrated drilling project management services for an Indonesian oil company --- of which Rennier Latief is a director. In February 2006 their new arm, Federal Offshore, without any prior experience, secured a US$90M 10-year contract to charter out an FPO vessel to a Petrochina subsidiary operating an Indonesian oil concession with the Indonesian oil ministry. The last big contract was probably not due to Indonesian influence --- to supply pipes to the Middle-East for US$17M.

Despite Federal's strong performance in 1H06 as a result of these dealflow, the two strategic investors sold off a majority of their respective stakes in late June-early July, at probably ~50 cents. It is interesting to note that their last purchases were as high as 70 cents. But of course, they made money, and not a bad return .... probably 60% for getting in and out in the course of 6 months. There is little information on the new stakeowners, just the inscrutable names Fabulous Commercial, Excel Key, Unichem Assets Management. The lack of publicity probably suggests these are not exactly the same kind of "strategic investors".

It is also interesting to note the resignation in June 06 of a Federal director, also one of the three founders of the group. Will the dealflow dry up? The abovementioned long-term charter of the FSO vessel should provide some recurring income, but other than that it should be fair to say that the catalysts that propelled Federal's share price upwards earlier this year are gone. Given its rather insipid topline and bottomline track record so far (before 2006), and add to it the rather disturbing circumstances in which several stakeholders exited (management included), one should be cautious on this stock. A risky one even if one wants to get exposure to the Indonesian oil sector --- but where sector is strong but company looks dodgy, it's better to avoid.




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