Highlights

10 years uninterrupted profit record… APB Resources is an established process equipment fabricator mainly involved in petrochemical, oleochemical and energy sector. Its products include pressure vessels, heat exchanger and heat recovery steam generator. It was listed in May 2004 via the RTO of NCK Corporation. APB has registered uninterrupted profit since 2004. 90% of revenue is from export with main clients from international major EPCC providers. APB has 2 fabrication yards, one in Subang and another in Gebeng.

Wildcard – Indirect beneficiary of RAPID…We understand that APB is not directly participating in any RAPID packages, but given more than 30 years’ experience in petrochemical process equipment, we do not rule out any possibility of subcontractor jobs from major international EPCC to be awarded to APB. We expect more EPCC contracts to continue roll out in 3Q14 after site preparation, Cogeneration Plant and Raw Water contracts have been awarded to ensure RAPID will be operational in time (early 2019).

Net cash is 40% of market cap with 10% FCF yield!!…In 2Q14, APB registered net cash position of RM63m or RM0.57 per share. With annual maintenance capex of RM3m, free cash flow is about RM15m per annum with FCF yield around 10% in FY15.

One of the few O&G stocks with decent 5% dividend yield… APB has been rewarding shareholder with good dividend. Since FY05, APB has been consistently paying 6.5 sen dividend per share (exclude FY11 with only 3 sen). At current share price of RM1.43, this translated to 4.5% dividend yield. We expect the dividend to be sustainable in future given huge cash pile (RM0.57 per share) and FCF yield of 10%.

1H14 result…1H14 earnings registered RM7.9m represented 50% of our FY14’s forecast. Outstanding orderbook stands at ~RM70m and will last for 9 months. We understand that the contract duration for process equipment is relatively short with range from 6 to 9 months. Past track record suggests that orderbook replenishment rate will offset the contract burn rate and sustain revenue going forward.

Oleochemical outlook in Indonesia… Ministry of Indonesia targeted Indonesia to be world’s largest manufacturer (from fourth largest currently) of oleochemicals in 2020. Oleochemical production capacity expect to reach 4.2m tons in 2014 from 3.8m in 2012 with investment from leading industry players such as Sina Mas, Musim Mas and Permata Hijau Group. We believe capital investment in oleochemical will be sustainable and benefit APB given rising output from upstream, consumption growth in China, India and Indonesia.

Risks

• Overcapacity in oleochemical and O&G industry.
• Execution risk.

Valuation

Significantly below SOP of RM2.07…We arrive fair value of RM2.07 based on: i) 10x FY15 earnings (+5% yoy); plus ii) net cash position of RM63m or (RM0.57 per share). Our fair value of RM2.07 also implied 14x FY15 P/E (vs. average oil and gas peers’ of 14x) and 10x ex-cash FY15 P/E

Source: Hong Leong Investment Bank Research - 31 Jul 2014