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19-Apr-2011
ZICOM GROUP, NORTHER STAR RESOURCES & AP EAGERS
Engineers ride the oil and gas boom
ASX Code ZGL, NST, APE
The word sexy does not come to mind when associated with manufacturing, but investors in the tightly held Zicom Group are getting excited - its stock price has almost tripled in the past three months.

The rise in the ASX-listed company based in Singapore has coincided with a profit upgrade on February 7, that pre-empted its interim profit result in which revenues climbed 49 per cent to almost $S80 million. This produced a profit before tax of $S10.4 million, which was more than double the same period a year earlier.

The company has turned itself into a manufacturing conglomerate, but a key to its growth is its success in the oil and gas field, producing winches for drill rigs, as well as gas metering and regulating systems. The oil and gas division contributes about 42 per cent of its revenues.


But Zicom's profit growth was also due to its other two divisions. The construction division (40 per cent of sales) grew profits because of lower costs associated with the transfer of its factory operations that produce cement mixers from Australia to low-cost Thailand. The rest of the income comes from its engineering division, which has operations as diverse as medical technology and manufacturing production lines.

At 57¢, the company has a market capitalisation of $120 million, and the founder and chief executive. G.L. Sim, says the key to the company success is not the oil price climbing back towards record levels, but the 50 or so engineers it employs in Singapore, Indonesia and Bangladesh. They provide the innovation and technical expertise that he says is central to Zicom's business.

Helping things along was also a bullish report by Austock Securities in late last month valuing the stock at 75¢. The climbing stock price comes as Ventrade, a Singapore bus construction company, sold the bulk of its 14.4 per cent stake, which finally gave investors some shares to trade. The stock is tightly held, Sim owning 34 per cent and senior management holding another 20 per cent.

A lack of liquidity is just one risk in this manufacturing play. Other factors include the difficulty in keeping on top of its operations, which are mainly in Singapore and Thailand. Most of its earnings are in Singapore dollars, which have been declining against the $A. Lastly, its engineering division's growth relies on start-up research and development projects. In the end this could be complicating matters for Zicom.

"We just focus on making machines," Sim says.

GOLDEN WORDS

Bill Beament, the managing director and 10 per cent stakeholder in Northern Star Resources, believes his company will more than quadruple in size in the next three years into one with a market capitalisation of $500 million.

At 42¢ the West Australian goldminer is capitalised at just over $120 million. Beament, 36, says that this phenomenon will occur through a combination of cash from operations and takeovers.

"We have severe cash flow … I'd be disappointed if we didn't take over a company at least as big as us within six months."

Northern Star certainly seems to have firepower. It has about $10 million in cash and bullion, and its 2011 mine plan for its Paulsens project, which it acquired in July, forecasts $40 million of cash flow through the production of 75,000 ounces of gold.

But how long will its cash last? Paulsens is its only producing asset and has an officially rated resource of 226,000 ounces. So this is only gold that it thinks it has, and implies not much more than three months of mine life. Beament goes into geologist mode and says that savvy investors are working out that there is a lot more gold in Paulsens than is officially the case.

"It's shallow plunging, like Norseman Gold's project, which has never had more than three years of mine life but been around for 75 years. The mine gets about 75 metres deeper each year and consistently runs at 1000 ounces per vertical meter."

There were some who thought Norseman Gold would have gone bust, had it not raised $10 million in equity recently. Its shares were down 48 per cent yesterday after a production update indicating the company is nowhere near meeting its previous production guidance.

"I'm young, but I learn quickly," Beament says. Investors are gambling that this is the case.

CARS V CARS

There is talk that the listed car dealership AP Eagers, with a market cap of $370 million, is getting together with the News Limited-owned online business carsguide.com.au to take business away from Carsales.com, whose market cap is $1.2 billion AP Eagers would not comment but has said in the past that it "wants to keep competition healthy". The Queensland dealership business would not want Carsales to have everything its own way in the online space, as it seems to at the moment.

Deutsche Bank estimates that 40 per cent to 60 per cent of dealership leads come from online, of which Carsales has a 70 per cent market share.

The development would limit Carsales's ability to increase its subscription prices in the short term. However, as far as AP Eagers is concerned, it may be a pyrrhic victory, given the damage that would be caused to earnings if customers no longer came from Carsales.com. It would take a very long time for the new venture to build up the leads to replace those lost.

 

After Friday's column, Norton Gold Fields contacted BusinessDay to clarify that when its managing director, Willie "Andre" Labuschagne, said there would not be a capital raising, he meant that this was in relation to the company's operations. A capital raising was being considered for the $85 million of debt on its books that was a legacy of its hedging facility with Lehman Brothers.

SOURCE: FAIRFAX

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