There hasn’t been regular updates as this is traditionally a really busy time of the year for me, work-wise. School holidays + everyone wants to get work done before going for summer vacations. In fact, I too, am planning my CNY getaway next year right now as we speak.
(Just inserting a random summer vacation pic so that email pic below doesn’t become picked up as the heading pic by other aggregating websites!)
Well, I’m actually ok with visiting and doing all the CNY stuff. It’s all great fun for the kids too. It’s just that my schedule tends to be really really tight these days, and going around visiting lazily just seems to be a huge waste of time. Increasingly, time is the major consideration when it comes to planning my travels, instead of cost. And every year as I waste time go around saying hi to relatives, I’d always feel like precious time is being wasted.
And here’s a major heads up: CNY 2018 falls on a friday and saturday, making it a prime period to travel with the long weekend.
I’m looking at Europe or Scandinavia to kick off 2018; the Stonehenge (UK) sits high on my to do list, but wife is not too keen on freezing temperatures. Actually, neither am I. As I get older, the homeostatic system doesn’t work as well and my tolerance for temperature variance is hugely narrowed. Anyway, UK is best seen during autumn. No debate about that.
Anyhow, although there hasn’t been any updates of late, I have been communicating via email with some readers. 1 particular email that I received a couple of weeks back, stands out. I’ve permission to publish it in full, so no blocking out of names this time around:
Oh wow. I am incredibly flattered.
And as frequent a traveller as I am, I have never ever had a random stranger on a flight discuss investing with me. Not once. How nice would that be.
Anyway, aside from this, it seems I’ve had quite a few individuals discuss about the coal plays on SGX with me. Here, I’ll share my thoughts on the 2 largest listed coal players on SGX. (There are 4 in all)
I’ve already previously written extensively about Geo Energy, so this won’t be exactly about Geo only, rather, I’d do a comparison between Geo and Golden Energy And Resources (GEAR). At the point of writing this, I own 600,000 shares of Geo Energy at an average price of $0.1825.
Now, since Geo and GEAR have many similarities, if one wants to own a coal player listed on SGX, one would’ve to at least compare both.
Based on most common parameters, GEAR is actually superior to Geo in many aspects. Yet, prior to the recent mini crash in Geo’s share price, Geo was actually rising rapidly unabated whereas GEAR’s share price has done nothing but gone down.
Why the difference?
I’ll take the lazy way out and link to an article on NextInsight that perfectly illustrates this:
Now, the only thing that I disagree with this article, is the conclusion:
“GEAR lags behind Geo Energy in share price performance maybe due to the market’s unfamiliarity with GEAR. Hopefully, this will be resolved to some extent by its continual delivery on its results (supported by a positive macro outlook), coupled with its investment seminars and site visit.”
I don’t think these days, you can attribute a chronic underperformance or deviation from peers to simply “market unfamiliarity”. That really is way too simplistic. Unless the company is hawking quantum physics kinda products where nobody understands, then perhaps, you could attribute it to unfamiliarity.
But coal? Come on. There must be something else.
The article has a nice table comparing various parameters between the 2 companies, so do go look at it. It’s self explanatory.
Aside from what’s already been mentioned, I’ll discuss some other parameters.
Origin Of Revenue
The bulk of Geo’s coal goes to end clients in China, whereas the bulk of GEAR’s (57.5%) goes to end clients in Indonesia. The coal demand in Indonesia is much more predictable currently, with Indonesia’s electrification plans and building of coal power stations. The 1st coal power plant in Indonesia will be coming online sometime in 2019, and that’ll be followed quickly by a stream of coal power stations, so we can expect demand to be present for sure. Also, there is a geographic advantage to have your end client situated in close proximity to your coal mines. Some power plants can even be mine mouth plants.
China, on the other hand, is cracking down on low quality coal, and in fact, what’s not been mentioned often enough is that China actually wants lesser coal imports to support their own coal industry. Their conundrum though, is that Chinese coal mines are much more inefficient than Indonesia’s, simply because they are underground mines where costs are much higher.
All that just means that Geo is more vulnerable to changes in chinese coal prices compared to GEAR.
GEAR relies on minimal debt, and their BS looks solid currently. Gearing is at a negligible 0.07 times right now, and as of last quarter, they have a healthy cash holdings of >$100mil.
Geo’s BS has also improved considerably, but they still have a MTN that’s due in Jan 2018. As of a few minutes ago though, Geo’s latest announcement indicated that their MTN refinancing is proceeding as planned, as existing noteholders have already green lighted their plans.
So Geo is not exactly in distress either, but if you compare, obviously GEAR has a stronger balance sheet, with less debt.
Average Selling Prices
GEAR also seems to be able to command better prices for its coal compared to Geo. I’m guessing it’s cos of GEAR’s larger production volumes.
In FY17Q1, GEAR’s ASP is US$40.86 per tonne, whereas Geo achieved US$39.45
As stated in the NextInsight article, GEAR’s cash costs is considerably lower than that of Geo’s.
I consider this a particularly important metric to look at, as it directly affects the cash profit / tonne, aka EBITDA.
Look at GEAR’s cash costs and EBITDA tables:
Cash profit per tonne shot up to $15.32 in FY17Q1.
That same figure for Geo is $13.52 for FY17Q1.
All these beg the question: Why then, do I prefer Geo over GEAR?
The answer is simple: Valuation.
Let’s look at the FY17Q1 figures for both the companies.
GEAR’s GPM for the quarter is a very cool 50.4%. That compares favorably to Geo’s GPM which is merely half of that at 25.5%
Yet when it comes to NPM, GEAR’s NPM is 13.3% vs Geo’s 14.74%
Why is GEAR’s GPM so much >>> Geo’s, yet it’s NPM comes in below that of Geo?
The answer lies in the substantial non controlling interests in GEAR.
For FY17Q1, GEAR reported EPS of 0.35 cents:
Let me digress a bit. Actually, I’m not sure why they used 5,373,548,000 shares to calculate the EPS. The company has 2,353,100,000 shares outstanding.
I didn’t understand the explanation given either. It says:
“The weighted average number of ordinary shares is calculated based on:
(a) the number of ordinary shares outstanding from the beginning of the prior period, up to the completion of the RTO (“RTO Completion Date”) is computed based on the weighted average number of ordinary shares of the GEMS Group outstanding before the RTO Completion Date multipled by the exchange ratio established in the share purchase agreement of the RTO; and
(b) the number of ordinary shares outstanding from the RTO Completion Date up to 31 March is the actual number of ordinary shares of the Company outstanding.”
well, that’s just bad english cos I read it a few times and I still don’t know what it says.
When you have a heading “The weighted average number of ordinary shares is calculated based on:”, whatever comes after that is supposed to be a continuation of the heading, but in this case, it becomes a super long sentence that doesn’t make sense.
Anyway, to their credit, they did work out EPS based on the issued shares in a separate statement:
“Applying the weighted average number of shares in issue of GEAR at 2,353,100,380 ordinary shares (31 March 2017) and 2,170,120,082 ordinary shares (31 March 2016), the basic and diluted earnings per share for the 3 months ended 31 March 2017 and 31 March 2016 are 0.81 US cents and 0.08 US cents respectively.”
Alright, so let’s assume the EPS is now 0.81 US cents for Q1.
Geo, on the other hand, reported EPS of 1.21 US cents.
And THIS, is the gist of what I’m driving at.
It seems that GEAR has superior operational capabilities compared to Geo, but the actual earnings accrued to shareholder of the company is substantially lesser than that for Geo, because a big chunk of the earnings derived from GEAR’s “superior machine”, actually belongs to non controlling interests, and not to shareholders of the company.
So if I’m a car salesman, and I tell you that there’re 2 cars. Car A is a sports car that can run quickly, such that the maximum mileage is 100km over the next year, but at the same time, it’d likely break down at the 50km mark.
Car B is a utility vehicle, it moves more slowly, and so the projected mileage over the next year is only 70km. But Car B is not going to break down, and hence, will travel the entire 70km.
If you’re buying a car for the next 1 year, and your objective is to travel as far as possible, which car would you get? Obviously car B.
The function of all the superior parameters of GEAR, is to derive earnings for the shareholders. But if the shareholders only get to keep a fraction of the earnings generated, then it becomes much less attractive.
To illustrate this yet further, let’s assume that hypothetically, GEAR has no controlling interests, aka the sports car A doesn’t break down. The total earnings that accrue to shareholders in Q1 would be US$29.6mil, based on 2,353,100,380 shares, that works out to be an EPS of 1.26 US cents, which would be close to what Geo is doing.
All these have the effect of depressing the valuations of GEAR.
As an academic exercise, let’s just extrapolate Q1 into full year earnings. GEAR’s FY 17 EPS would thus be 3.24 US cents or 4.37 SG cents. At a share price of $0.41, that gives an implied PE of 9.4 times.
Geo’s FY17 EPS would be 4.8 US cents or 6.48 SG cents. At the current share price of $0.25, that gives an implied PE of a mere 3.9 times!
So there we have it.
The reason for the big difference in share price performance between the 2 peers, is not “market unfamiliarity”. It’s simply valuation.
Geo’s management knows that too, which is why they came up with this nice little table in their latest briefing deck:
Everything that I’ve explained at the top, basically culminates to this table.
Also, note that it says average PE of its peer group is 11.8. I’ve used 10x in my projections for Geo previously, to be conservative.
Moving on to something different now, I’ve previously said I’m monitoring the results of my options activities. I’ve reported the results from the 1st month, and yesterday concludes the 2nd month. So this is a continuation of the previous post:
Total cashflow received from 12/04/2017 – 12/05/2017: US$13,657.25
Since then, I’ve done this:
Total cashflow received from 13/05/2017 – 13/06/2017: US$13,911.82
Frankly, I’m tabulating the results right now as I write this post, for the 1st time. And I’m surprised. Cos it felt like the progress is slower and results are poorer compared to the prior month. Cos this month has been a more of a down period compared to the prior month, and my 1st impression is that my strategy seems to sputter a bit when markets are severely down.
In fact, I realized there’s a slight flaw in what I’m doing. I’ve been keeping the call options that’ve been exercised as open columns, and thus, been compelled to sell put options on those positions. Going forward, I’ll be attempting to keep it more “asset lite” (if I can put it that way), by eliminating exercised call option positions, so that when the market goes down, I’d have more capital to capitalize.
Also, this months results were somewhat artificially bumped up by the last day (13/06/2017) when several things went my way and I managed to pocket almost US$2.9k worth of premiums in a single night. (I set up positions, went to put my son to bed, and 15mins later viola! Called it a day.)
I have not increased my overall allocation, but am still waiting for more data. My overall positions, despite having several options that were exercised, have not changed much. In fact, it’s pretty much the same as 2 months before.
Overall, I’m pretty pleased how this is turning out thus far. Not gonna complain about almost US$14k worth of CFs every month, and yet, as I dissect the activities and analyze them, I think this can be improved even further.
Alright, so that’s it for this long post. Going forward, the posts will likely get less frequent.
As always, happy hunting!