As we enter into the new year, our readers might be looking out for potential stocks to add to their portfolio. However, do not be lured by the low valuation of some of these stocks and enter the market hastily. In this article, we will be highlighting why investors should avoid investing in small and mid-cap offshore and marine (O&M) firms for now.
Period of financial uncertainties, not a good time to enter the market
Small/mid-caps stocks in the O&M industry might seem a lot cheaper as compared to the large caps players. On average, these small/mid-cap firms are trading at about 0.36 times of their forecasted price to book value whereas the large-cap competitors are significantly more expensive, trading at about 1.3 times price to book value. CIMB opines that the first half of 2018 is not the time to enter the market.
In the first half of this year, volatility seems likely to continue in small/mid-cap firms. 2017 was probably not the best year for many of the businesses that went through financial restructuring. Four firms have even been suspended from trading on the stock exchange or had been delisted (includes Ezion, Ezra, Nam Cheong, Triyards).
Looking back at the past trends, it is likely that small/mid-cap stocks will outperform in the long run. However, it will be better if investors entered the market after the firms carry out their “housekeeping” exercises (impairment/refinancing) to provide a clearer picture of their earnings growth.
Ezion had a terrible 2017 as its struggle to sustain itself ended in suspension from trading in August 2017. Currently, the firm is negotiating with its secured bank lenders, and they will have to hold an Extraordinary General meeting with the shareholders before the suspension can be lifted.
The possible outcome of Ezion’s trading suspension could see a notable expansion of its share capital, increasing from 2.1 billion to a possible 6.6 billion shares. This scenario will occur “assuming full conversion of all bonds/perpetual securities/warrants”, according to CIMB Research. In this case, net asset value per share may drop to a whopping US$0.32 from its current US$0.62.
Pacific Radiance (PACRA)
PACRA is another firm that is struggling as it continues to suffer losses from operations, though it is worth noting that losses have narrowed due to “cost containment exercises”.
The firm has admitted that the twelve months ahead are still volatile as a drop in oil prices will hit the firm hard, especially so since charter rates are continuing to be low due to a supply glut.
CIMB Research also highlighted that there are safer stocks that investors may consider but it is still not the optimal time to enter.
CSE Global and Mermaid Maritime have been chosen as “safer” bets because of their net cash position which signals a stronger balance sheet as compared to the other firms.
However, CSE Global’s valuation is already near its nine-year average despite the fact that their projected earnings for the next twelve months are likely to remain below the average level of $30 million. Also, the firm will be announcing if they will carry out any “housekeeping exercises” such as having impairments/refinancing. The uncertainties evolving around the firm and its less than ideal profit level make it not worthwhile to rush into the market now.
Overall, CIMB opines that investors should stay off the small/mid-cap O&M firms for now till clearer signs of profitability can be observed.
Some of the key risks facing the industry include a potential lifting of production ceiling by the OPEC or higher production levels from the US which will overturn the others effort to keep up oil prices.