Geo Energy Resources

TTI Bought >$100K Worth Of Equities In July… Howard Marks’ Memo Better Don’t Come True Right Now!

The title basically sums up how I feel right now.

I’m sure many have already read it, as I have, but the said famous memo above can be found here if you haven’t:

https://www.oaktreecapital.com/insights/howard-marks-memos

I absolutely love to read this guy’s memos. Of course, when you’re a billionaire, suddenly everyone wants to hear what you have to say, hoping to glean some secret formula to riches in your writings.

But that’s not really the reason why I love his memos.

The reason is actually very simple: They are easy to read.

Lots of common sense, easy to read and easy to understand, and yet a lot of thoughts go behind each statement. Some times I can think about it while having a shower and suddenly have a flashback on what I’ve read several weeks ago, rush out and re read it to have a new understanding. Yup.


I’ve been a big spender in the past month, adding almost $100k to my positions. (Of course, I sold some other stuff too)

Looking back, I haven’t really added anything significant this whole year. I did trade a little around my Geo Energy position, earning a miniscule $500++ each time, because it was in such a tight and predictable range. I did buy some minor stuff, adding cosmetically to some positions, but nothing significant, quantum wise.

Until now.

Suddenly July opened up a lot of opportunities and I couldn’t resist adding. It’s the problem with sitting on too much cash. You can’t sit still. Inactivity is really the toughest thing to do.

That’s the nature of my SG equity portfolio. Long periods of relative inactivity and peace, but when it comes, it’s fast and furious. In any given year, I’d likely not do too many things, not look at too many stuff either, but probably focus on just 1 or 2 big things. So what has transpired?

DUTECH HOLDINGS

I added 50,000 shares on the 21/07/2017 at $0.37 and another 50,000 on the 27/07/2017 at $0.36. My overall position now consists of 730,000 shares at an average cost of exactly $0.29 (inclusive of all brokerage fees and other related costs)

The share price tanked upon release of a profit guidance.

578) Dutech holdings share price.jpg

Nobody really knows how bad Q2 earnings would be, and I suspect the markets are pricing in losses. It’s very much possible. Dutech has everything going against it right now: Rapidly rising steel prices (which benefit my other holding LTC Corporation, so there’s a natural hedge here), global clients cutting back or delaying orders, excess fat and inefficiencies from a new acquisition and rising operating costs.

It’s going to be rough.

But then again, the markets know that. Everybody knows that.

If there aren’t bad news, the share price wouldn’t tank. If it doesn’t tank, I wouldn’t buy.

The funny thing always is… when the share price is rising and keeps rising (presumably on good news and/or expectations), everyone wants to buy it but always laments on the share price not dropping. Yup, that includes me.

But when the share price does drop, there must be a reason for it and now suddenly everyone’s afraid and you hear stuff like “catching a falling knife” or “cut loss level” or “wait and see”. That’s hopefully not me.

So a very rough gauge to tell if you’re NOT participating in the maddness of the crowd, is simply to look at the amount of news, coverage and general “noise” around.

This time last year, the share price was rising rapidly. You’ve news articles, analyses on the company. Financial bloggers tear down the prospects and paint a rosy picture. Analysts look favorably on the company. Everyone wants to get on board, but waits for a little “dip” to do so. Johnny Liu was praised to high heavens.

Dutech could do no wrong.

Fast forward 1 year later, or maybe a bit less, about 9 months later, now Dutech is hated. It’s a company with leprosy. Prospects look dim. I mean, it REALLY does.

Nobody has anything good to say about the company. Actually, nobody has ANYTHING to say about the company anymore. Suddenly nobody’s putting out nice articles about Dutech. Nobody’s clamoring to get on. CIMB ceased coverage citing “lack of interest”. Do a quick check: google and find all articles/posts about Dutech. Tabulate the dates, and plot it against the share price chart of Dutech and you’d see what I mean.

Having said all that… being contrarian simply for the sake of being contrarian is absolute maddness as well. One can get skewered for doing that.

Even if you’re right… being wrong for a long time before being proven right, is no different from being wrong.

So what’s my rationale?

Firstly, I think Dutech’s unfairly beaten down because of the panic right now. I mean, I’ve received numerous emails and comments asking about Dutech. I can literally sense the fear and despair. Even long time value investors whom I know…. are starting to lose faith. The doubt is understandable. I am not spared too. What does the profit guidance mean? Could it be just reduced profits? Or does Dutech sink into losses? And if losses, how bad can it be? How about future quarters? Nobody (Aside from management) knows right now, neither do I.

With higher order thinking, it makes sense that the time to buy is when nobody really knows. When the uncertainty is at its maximum. Of course, whenever I buy something… it always gets cheaper right after I buy it. Always. It was the case when I first initiated my position in 2015 at $0.27. It will be somewhat similar now.

Anyway, IMO, the ones bailing out right now, are mainly the retail investors who have gotten onboard in the past year when the share price was rising rapidly.

Look at the shareholder lists:

581) Dutech shareholder list 2015.jpg

582) Dutech shareholder list 2016.jpg

Within a year, as the coverage increased and the share price rose, the number of shareholders rose accordingly from 625 to 805. Yet, all the increase came from shareholders with relatively small positions of <1,000,000 shares.

The big buyers with >1,000,000 shares remains the same.

It is the same group of retail investors with relatively small holdings who are scared witless right now. I don’t think the 24 shareholders above are selling.

In fact, perhaps I’ll make it 25 by the time I’m done.

Secondly, I think a relatively quick turnaround is on the cards. I won’t talk too much about Dutech’s “Business Solutions” division. That’s going to be the main focus for the company going forward, and that’s where all the M&A is being done. It just takes time for Dutech to assimilate the newly acquired Metric businesses.

The hardware part, the “High Security” segment is where it gets worrisome. There has been a lot of talk about our society going cashless, with the resulting need for less ATMs and hence, less of the safes that Dutech supplies.

To have a sense of what’s going on, I went downstream in the supply chain to look at some of Dutech’s main clients: Diebold Nixdorf and NCR Corporation.

Just for the sake of brevity, I’ll just quote Diebold.

Diebold’s results dropped as well, following a reduced profit guidance. (Yes, similar to Dutech. So we have a good reflection of Dutech here)

What are the problems Diebold is facing?

579) Diebold results.jpg

In short, banks in most developed countries as well as some developing countries (Except India) are delaying the implementation of new ATMs. With the delay, comes a corresponding delay in service and maintenance contracts for these ATMs. Diebold’s existing contracts are running off, while new ones are not signed and revenue is not recognized.

The good news is that there’s sequential growth in order books, and the order backlog is increasing:

580) Diebold backlog orders.jpg

OK, the way this post is going, it’s going to be ultra long so I’ll have to be brief from here onwards.

In summary, Diebold is experiencing more orders, but the actual implementation of ATMs and their service contracts is dragged out over several more quarters. So the order book is increasing (Increased by 6%). Diebold expects a bump in revenue recognition sometime in Q4 onwards. It seems that banks are cautious to commit to big, long term contracts, only to find that there is little mileage as ATMs become under utilized.

And I won’t go into details here, but if you look at even their reduced guidance, it’s really not that bad as to warrant a 17% fall in the share price in 2 trading days.

Which leads me to my next point.

DIEBOLD NIXDORF

I entered a long position in Diebold Nixdorf… after researching on the reduced guidance, because of Dutech Holdings. So 1 thing leads to another.

This is probably a good, quick summary:

http://www.pymnts.com/news/retail/2017/diebold-shares-plunge-on-lowered-sales-guidance/

Upon release of the news, the share price tanked from $28 to as low as just below $20.

577) Diebold share price

I thought the plunge was exaggerated, and decided to go long. My long position was not a pure equity positio though:

Following the plunge, I sold several far out of the money put options (that are unlikely to be exercised), sold some in the money put options at an exercise price that I’d be happy to buy at, and used the premiums to buy an equity position.

And of course, I didn’t buy at it’s absolute lows, but initiated a long position when there’s some sign of a rebound.

The way I see it, such a set up would only be a losing position if the share price suddenly continues to tank, such that my pure equity position loses money and all my put options gets exercised.

This is a scenario that is highly unlikely, since all the bad news have already been priced in.

If the share price even remains flat, it’d be a safe position because the premiums from the expired options would basically cover almost all my equity position.

As it stands, it’s been only 2 weeks since I’m done with my long position and the share price has continued recovering. I’m sitting on a profit of around US$4.3k right now at the time of writing (assuming put options all expire). I’d be looking to exit when the share price reaches the US$24.5 or so thereabouts.

GEO ENERGY RESOURCES

I added 100,000 shares on the 26/07/2017 at $0.24. Right now, I have a total of 600,000 shares at an average cost of $0.182.

Geo Energy is such a headache.

Coal prices have continued increasing unabated as I expected them to, going into the summer months. Yet Geo Energy’s share price has dipped.

What gives?

There are a few factors to consider: The average selling price of the coal it mines & the total volume of coal mined.

I think it’s safe to say that the ASP would be well protected in Q2. Geo is likely to report an ASP that’s not too far away from what’s achieved in Q1 (prob a tad lower), which is really not too bad at all.

For the record, the ASPs achieved looks like this:

2016Q1: US$26.66

2016Q2: US$25.17

2016Q3: US$31.40

2016Q4: US$38.93

2017Q1: US$39.45

I don’t think Geo’s ASP in Q2 would be too far from US$37 or so.

583) Indonesia HBA index.jpg

Geo’s ASP is pegged to Indonesia’s HBA index. After a sizable drop in June, the index has since recovered.

At the end client side, Chinese import coal prices at QinHuangDao has continued rising going into summer and is now again out of the range guided by China’s NDRC. They’re having real difficulty keeping prices in check.

584) QinHuangDao prices.jpg

So it’s safe to say that prices are still very much well supported.

To investigate further, I looked into the major clients/end users of Geo’s coal.

585) China Resources Power.jpg

In 2016, Geo delivered 5,510,723 tonnes and in 1Q2017, they delivered 2,212,893 tonnes, giving total tonnage of 7,723,616 tonnes.

Of which, China Resources Power is the end user for 2,189,149 tonnes or 28% of total volumes mined during this stated period.

Fortunately, China Resources Power is a public company listed on HKEx, so it is not difficult to dig into the happenings of the company.

Aside from power generation, the company owns several coal mines themselves too.

586) China Resources Power March 2017.jpg

I’ve highlighted the thermal plants part under power generation, since that’s what we’re interested in. In Q1 of 2017, thermal power generation increased by 2.0% y-o-y.

587) China Resources Power March 2017 coal generated.jpg

During the same quarter, coal production increased by 8.8% y-o-y.

Now, let’s compare it to the 1H results to have a sense of how things have progressed.

588) China Resources Power June 2017.jpg

In 1H, thermal power generation has increased much more rapidly, by 8.1% y-o-y

It’s more accurate to compare figures for each quarter against the preceding year’s, instead of comparing q-o-q due to seasonal demands. For example, Q2 and Q3’s thermal power generation is always going to be higher than Q1 due to the summer months.

589) China Resources Power June 2017 coal generated.jpg

Yet, the total coal production for 1H came in at -3.1%.

So let me give my interpretation of the results:

Thermal Power Generation: Q1 2017 increased from Q1 2016 by 2%, yet at the 1H mark, this same metric has increased by 8.1% y-o-y.

This can only mean that thermal power generation has increased in both 1Q2017 and 2Q2017 vs their corresponding periods last year, but has increased at a faster rate in 2Q2017 vs 1Q2017. So the nett effect is that we know that China Resources Power burnt coal at a faster rate in 2Q2017 vs 1Q2017, and also in 2Q2017 vs 2Q2016.

Coal Production: Q1 2017 coal production increased by 8.8% y-o-y, yet at the 1H mark, this same metric has actually decreased by 3.1%. This can only mean that coal production in Q2 of 2017 has dropped so much vs the corresponding period in 2016, so as to drag down the change from a +8.8% as of Q1, to a -3.1% change as of 1H.

So the overall conclusion is:

Comparing Q2 vs Q1, rate of thermal power generation increased, whilst the coal mined rate decreased.

Logically, this means that they’d have to import more coal in Q2 to make up for the shortfall.

Now, that’s a good conclusion to have for Geo Energy.

Perhaps the best indication of well supported coal prices comes from this profit warning by China Resources Power:

590) coal costs china resources power

This is not foolproof though. China’s NDRC has been encouraging utilities to lock in long term contracts with local miners. So we don’t know for sure whether the amount of coal taken from Geo Energy has increased or decreased or stayed the same.

In addition, from reports at the QinHuangDao ports, it seems that utilities and coal importers are locked in a standoff over prices. Coal importers are unwilling to lower prices, but utilities are unwilling to buy either. So we have a stasis whereby prices look high as evidenced by the coal indices, but the actual volumes transacted are reportedly very low.

And therein lies the uncertainty. The uncertainty for Geo Energy lies in the amount of coal mined. Prices are going to be ok, but can they deliver?

Add on to these worries is rainy weather that may again curtail mining activities.

Volume though, is not my biggest concern, although judging from comments on IN and other forums, that’s what most people are looking at. As recent as a couple of weeks ago, management has reaffirmed their commitment to a 10mil tonnage target for this year. Q2 has already concluded, so they’d know the figures. Surely they’d revise if they think it can’t be met.

My biggest worry is actually this:

Regulation No. 34 of 2009 and the relevant update: Regulation No. 23 of 2010

For the serious investor, you can read the hardcore version here:

http://www.eisourcebook.org/cms/February%202016/Indonesia%20Mining%20Law-%20Revison%20PP23-2010-%20English%20version.pdf

Basically, Indonesia’s government wants to limit both the total coal mined, as well as the volume of coal exported. The rationale is to control the amounts of coal, such that there’s adequate supply for domestic use as part of their nationwide electrification plan starting in 2019.

http://www.globalindonesianvoices.com/30567/government-prepares-new-regulation-to-limit-coal-export/

Any regulation to limit the annual total volumes of coal mined, or to increase the amount miners would have to set aside for domestic consumption, would be bad news for Geo Energy.

As described in their own latest investors update:

591) Regulation no 34 of 2009

So there.

I’m cognizant of the positives for the company and the potential road bumps ahead.

By doing a simple extrapolation of Q1 results, the projected PE ratio based on the current share price is a ridiculous 3.5 times. At these levels, I think there’s sufficient MOS for me to increase my position.

ISHARES BRAZIL ETF (EWZ)

I previously posted about my long position in this in IN, but not here.

This is what I’d classify as a classic “distressed” situation.

On the 17th May 2017, news broke of Brazil’s president Michel Temer being involved in yet another corruption scandal.

I said “yet another” because his predecessor and close ally, Dilma Rousseff, was similarly caught in a corruption scandal which caused her the top job.

I won’t go into the specifics of the scandal, but it makes for an entertaining read. Personally, I think we have the makings of a oscar winning movie right here. Just need a director to pick up the juicy bits, it certainly is more exciting than many other movies:

http://www.bbc.com/news/world-latin-america-35810578

http://www.businesstimes.com.sg/government-economy/whos-who-in-brazils-presidential-corruption-scandal

The markets took the news of the scandal hard. Real hard. The iShares MSCI Brazil Index (EWZ) fell close to 20% in 2 days!

I took notice immediately and set out to find out all details of the case, why the markets are reacting the way it did, whether it’s justified (for sure there’s a fear “premium”, but sometimes, the fear is completely justified), and with all the facts, tried to figure out how things would look like 1-2 years out.

Personally, I love mispricing in the markets caused by political problems. This is because these are usually relatively transient in nature, and can be resolved relatively quickly. The one big exception is if it’s war.

War is a different ball game. It can drag on and on and on and while you can capitalize on the increased volatility by buying and selling because of the relatively large drops and rises, within the period of war, IMO it is a tough game to play. I’d rather stay out.

Anyway, back to this.

The brazilian markets took the scandal hard because well, they have had 2 presidencies affected by corruption within a very short period of time. On top of that, his predecessor was forced to step down.

Michel Temer was also in the midst of implementing tough reforms. Reforms that were viewed favorably by the markets. With a prior precedent, it was feared that he’d be impeached, forced to leave and throw all these reforms in disarray.

576) EWZ chart

The share price tanked as low as $33++.

Of course, I didn’t get it at the bottom. Hardly anyone ever does. And IMO, it’s not wise to try to.

When it comes to the international markets, because of the sheer number of participants, moves are much more exaggerated compared to SG markets. I’d usually prefer to wait till there’s some recovery. To top it off, if I’m uncertain, I’d prefer to build positions (both long and short) using options. The premiums involved would give a measure of protection. Of course, the tradeoff is that when it recovers, I might not always get the maximum returns, but that’s ok. I don’t have to win everything.

Anyway, I started building long positions with options when the share price was around $35. As of the time of writing, it was recovered strongly at $37.3.

In approximately 2 months, the price has recovered a cool 13%.

I’m not going to bother to annualize it, but certainly that’d make for some eye popping returns.

My position was built mostly by selling deep in-the-money put options. 2 of which were exercised, and I swung to selling call options, which were also exercised. In short, I’ve benefited partially from the share price recovery, and partially from the premiums from the options.

And why EWZ? I figured that the I really wanted exposure to Brazilian banks, since many of the reforms revolve banking rules. But since it’s difficult to get direct exposure, plus I’d need to get exposure to several banks at the same time (to diversify and spread risks), it’d make much more sense to buy an ETF on the general index. (Anyway, the index’s top 2 constituents consisting of 19% of the ETF is in financials)

It’s been a nice recovery, and in a relatively short period of time.

Too bad I didn’t build too large a position. The returns ROI wise would be great, but the quantum is too small to make a significant impact on my portfolio returns.

Still, it feels great. :)

That’s all I have for this long post.

Next week marks the start of earnings reporting season again.

Life is exciting.

Advertisements

Geo Vs GEAR! + Options Update

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.

557) Summer.jpg

(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:

549) Email from peter.jpg

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:

https://www.nextinsight.net/story-archive-mainmenu-60/939-2017/11407-golden-energy-share-price-lags-geo-energy-s-by-a-mile

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.

Gearing

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.

GEAR’s financials:

550) GEAR financials.jpg

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

Cash Costs

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:

551) GEAR's cash costs.jpg

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 FY17Q1:

552) GEAR's FY17Q1.jpg

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:

553) GEAR's earnings.jpg

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:

554) Comparison.jpg

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:

BBR Holdings FY17Q1, Geo Energy Resources FY17Q1, Results From Options Strategy (1 month)

Total cashflow received from 12/04/2017 – 12/05/2017: US$13,657.25

Since then, I’ve done this:

555) Options for May 1.jpg

556) Options for May 2.jpg

Total cashflow received from 13/05/2017 – 13/06/2017: US$13,911.82

Pretty consistent.

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!