TECFAST (0084) : An Almost Guaranteed 80% Upside?

This post was originally posted here. The writer, Teoh Tian Heng is a veteran community member and blogger on InvestingNote, with a username known as @thteoh58.

 

Dear investors, if you are reading the article, that means that you surely are not settling with a mere 10% to 15% rate of return per annum for your investments. I mean, who does?

Anyway, the article today will show you a qualitative and quantitative study on the business of TECFAST as well as the finances, as to how this company could be almost guaranteed to deliver a MINIMAL of 60% upside.

Qualitative Studies

TECFAST (or the “Company”) had an elaborate plan as to what, and when to venture into the oil and gas business. Dated 6th November 2020, we noticed that there is an LOI between Fast Energy Sdn Bhd (“FESB”), a wholly owned subsidiary of TECFAST and Zillion Oil Timor LDA. This marks the very beginning of journey for TECFAST to enjoy the recovery of busy offshore activities as well as the recovering oil price.

However, the LOI does not show any materialized information. It was until 15th March 2021 that the Company starts to deliver on what they promised.

Dated 15th March 2021, the Company had entered into a supply agreement between FESB and Wise Marine Pte Ltd (“Wise Marine”) – one of the largest ship management services players in Singapore, with a total contract value of RM2,222,856,000.00. With this size of a contract, it is normal for investor to treat it as some “not realistic”. Hence, the reflect in share price upon the announcement.

A deeper study into a contract would note that FESB would supply up to 30,000 metric tonnes of low sulphur fuel oil, low sulphur marine gasoil and high sulphur fuel oil per month to Wise Marine. The marine gasoil or fuel oil are collectively known as Marine Gas Oil (“MGO”). MGO are mainly used to power offshore transportation vehicles, such as oil tank, vessels, bunker ship and so forth. It is also interesting to point out that whatever FESB was selling to Wise Marine are based on a certain premium on top of the costs, are more commonly known as the “Cost-Plus” basis. This does not mean that FESB will never suffer losses, but as long as MGO prices are stable or on an uptrend, TECFAST as the holding company, would be the beneficiary of it.

A reference on Singapore Mogas 95 Unleaded Futures could see that since July 2020, the prices of MGOs are increasing on a steadfast trend.

To add on, the prices of MGO usually moves in tandem with Baltic Dry Index (“BDI”) as an indicator for busy shipping activities for dry commodities, as well as a steady oil price which would encourage offtakes of upstream Oil & Gas businesses as well as offshore support services.

Nevertheless, from local service orientated oil and gas companies, we couldn’t help but notice that they are having great profitability due to higher utilization of their vessels. Thus, the increase of demand of MGO.

I would also like to point out that the 2020 International Maritime Organisation (“IMO”) Fuel Sulphur Regulation had arrived in the industry where it technically “forces” ships or vessels to consume a maximum of 0.5% sulphur cap of the fuel oil or gas oil, as opposed to the previous 3.5%. This had – interestingly sent VLSFO prices to a higher region.

As VLSFO is one of the focus of FESB to supply to Wise Marine, and potentially other clients, we could foresee that FESB could be benefited from the increase of price. More so with the impose of IMO 2020 regulations, Malaysia’s effort to clean up highly polluting bunkering oil business could further enhance TECFAST business outlook.

On top of that, FESB had on 23rd March 2021 entered into another supply agreement with Huang Fan Sdn Bhd (“HFSB”) to supply up to RM540,000,000.00 worth of MGO to HFSB, or alternatively, 6 million litres of MGO for the vessels of HFSB.

The growth story for TECFAST is far from over – in fact, the company had on 2nd June 2021 published two different announcements: FESB had another supply agreement with Wise Marine to supply an additional 20,000 metric tonne of MGO per month which sums up to a contract value of RM1,460,592,000.00, and a joint venture agreement between TECFAST, Wise Marine and Fultonn Marine Sdn Bhd (“Fultonn Marine”).

The management had also informed investors that the delivery of MGO had started on April and is currently supplying approximately 10,000 metric tonnes of MGO per month. But what is the rationale of increasing the capping on number of MGO supplied?

Informed investors would know that a supply agreement always sets a higher ceiling on the total supply value, and more prudent investors would use the lower end as a benchmark of calculating the finances of the company. For FESB to increase the supply cap, it could only mean one thing – they might supply more than 30,000 metric tonnes in the foreseeable future. Hence, the topping up exercise to supply up to 50,000 metric tonnes of MGO would make more sense.

An excerpt of press from The Edge could also notice the following:

“Our volume of marine oil fuels supplied has been limited by the availability of bunkering vessels,”  said Techfast executive director Vincent Tan Wye Chuan in a statement.”Hence, we have decided to enter into a strategic joint venture, whereby Techfast will fund the purchase of a bunkering vessel to increase our capacity to handle larger supply volumes,” he said.FESB’s joint venture with Wise Marine and Fultonn Marine Sdn Bhd involves the purchase of suitable product tankers and perforing O&G trading activities.Fultonn Marine is responsible for facilitating the purchase of the vessel, while Techfast is to provide the funding.

We had seen the actual delivery of MGO, and now it is all about expansion of up to 50,000 metric tonnes of MGO supplied. Based on the corporate announcement, the Company noted that for each bunker, FESB and Fultonn Marine shall form a new joint-venture to accommodate the purchase. As it may be, TECFAST is on a fast track of expansion in the local oil bunkering business.

Enough of qualitative data. We shall now move on to the quantitative side of the Company.

Quantitative Studies

Taking 10 years’ worth of historical data, TECFAST’s existing business of manufacturing and distributing electrical & electronics related products, LED epoxy encapsulant had resulted a “decent” profit of RM2.0 million to RM3.0 million in bottom line per annum. By looking at the lower end spectrum of the company’s existing business and profitability, we would assume the contribution by this segment to be stagnant or slightly increase due to disposal exercises which would result in costs rationalization and thus, increases the margins and bottom line.

On the other hand, the company had also on recent acquired 35% stakes of an oil bunkering company – CCK Petroleum Sdn Bhd (“CCK Petroleum”). The acquisition could be a strategic investment to procure the necessary knowledge and network in the oil bunkering industry. However, coupled with the access of capital with FESB. Things would get out of hand pretty quickly – in a good way.

In order to define the value of the contracts as well as the potential profit for TECFAST, I had a simple simulation based on prudent calculation on the potential earnings of the company.

Of course, there are several assumptions in place. That is why I had taken account of:

1. A bull & bear scenario.
2. Initial pick up of business for first six months of per 10,000 metric tonnes of MGO delivered on per month basis.
3. Inclusive of profit guaranteed by CCK Petroleum.
4. Lower spectrum of existing business’s profit contribution.
5. Multiple spectrums of net margin simulation and final figure was taken on a fair and average manner.

The company is currently trading at RM0.315 per share as of 2nd June 2021 closing, and the number of shares outstanding is 396,511,111. Take that into account and we will arrive at a market capitalization of RM124,900,999.97. To be fair, there are no other oil bunkering businesses by comparison. We would need to take global leaders and work backwards by implying a 20% discount on the valuation. By taking some competitors of World Fuel Services – which is ranked #2 in global oil bunkering business, the median P/E ratio is approximately 24.97 times. A backward discount of 20% would result in 19.98 times.

By using the lowest possible profit for TECFAST in FYE 2021 – RM16,125,000.00 and times 19.98 times in P/E ratio, this would result in RM322,177,500.00 in market capitalization – indicating a potential upside of 157.95%. Of course, a more prudent investor would choose to half the potential earnings (Though I’m not sure why not harness the full potential of share price appreciation), you would arrive at an approximate 78.97% in share price appreciation. Pretty good for a bear scenario, half sliced valuation, aye?

Conclusion

Though the outlook for TECFAST is attractive, I must admit I had already invested heavily into TECFAST. Hence, you may need to refrain from taking everything from this report as there might be aspects of bias in it. That being said, I personally aimed for a mild bear case scenario of RM20.3 million in net profit for FYE2022F, as TECFAST achieved this figure, I believe there might be great potential for share price appreciation ahead.

Some investors are complaining about the loss in the first quarter in FY 2021, and that is fine – the company had not started their oil delivery to Wise Marine as the financial closing is on March. We shall see how far TECFAST could go beyond this point.

Personally, a 200% or more upside is ideal

Point of reference:

Outlook of VLSFO: https://www.hellenicshippingnews.com/bunker-prices-are-back-to-their-pre-pandemic-levels-what-should-we-look-out-for-in-the-next-12-months/

IMO 2020 Regulation: https://www.pwc.com/ng/en/publications/imo-2020-regulation.html#:~:text=The%20new%20regulations%2C%20known%20as,the%20fuels%20that%20ships%20use.

AV0M1 Future Price Chart: https://www.cmegroup.com/trading/energy/refined-products/singapore-mogas-95-unleaded-platts-swap-futures.html

Bursa Announcements: https://www.bursamalaysia.com/market_information/announcements/company_announcement?keyword=others&cat=&sub_type=&company=0084&mkt=&alph=&sec=&subsec=&dt_ht=&dt_lt=

Supply Data: https://www.theedgemarkets.com/article/techfast-signs-another-marine-fuel-oil-supply-deal-wise-marine-valued-rm146-bil

Global 20 Ports Average Data: https://shipandbunker.com/prices/#MGO

Global Top Oil Bunkering Companies: https://shipandbunker.com/news/world/800076-ship-bunker-seacred-pick-top-10-bunker-companies-for-2021