Giken Sakata acquired a 53.7% stake in Cepu Sakti Energy Pte Ltd

Company Background:
Giken Sakata (S) Limited (Giken) was incorporated in December 1979 (in Singapore) and was listed on the then SESDAQ (now known as Catalist) in February 1993. Giken positions itself as an integrated contract manufacturer that provides precision machining and engineering services for the manufacturing and assembly of finished products and semi-finished components for the electronic industry. Some products produced by Giken include printed circuit boards, precision micro shafts, turned parts, plastic injection molded parts and others. Giken has plants spanning Singapore, Indonesia and China with bulk of the sales going to Europe and Japan. Going forward, the company is looking at entering into more niche OEM jobs with established electronic MNCs and lift its utilization rate which is currently around 70%-75%. Giken recorded revenue of S$90m and S$137m and PAT of S$373k and S$451k for FY12 and FY13 respectively.

Inside Giken’s FY13 annual report, the Chairman Mr. Chin Siew Gim commented about concerns over the uncertain state of the European and American markets while the CEO Mr. Tan Kay Guan expressed the need to achieve higher resource optimization to cope with higher wages. The challenging industry environment prompted the management to seek alternative routes to boost profitability and the call for diversification led to the acquisition of a 53.7% stake in Cepu Sakti Energy Pte Ltd (Cepu).

The purchase consideration amounts to S$48m and will be paid via
1) approximately S$25.2m in cash and
2) the issue and allotment of new shares of the company for the remaining consideration at the issue price of S$0.30 per share.
The cash consideration will be split into two tranches - the first tranche of S$15m was paid recently while the second tranche of S$10.2m will be paid on a later date, after evidence of the renewal of oil production agreement for the Tungkul field is attained.

About Cepu Sakti Energy Pte Ltd: Cepu is headquartered in Singapore in 2002 and owns 95% of PT Cepu Sakti Energy. The latter has the right to operate and produce oil from three oilfields; in the Tungkul field in Blora, Central Java and the Dandangilo-Wonocolo fields (D&W fields) in Bojonegoro, East Java and the Kawengan field, also in Bojonegoro, East Java. The fields have a total of 230 old well sites, of which 14 are recently operational and producing about 670 barrels of crude oil per day in the month of June 2014. Cepu’s strategy is to drill a new well beside the old well and increase the wells’ depth with the aim of improving the flow rate.

According to the report prepared by Senergy Oil & Gas (Singapore) Pte. Ltd. dated 26 May 2014, the former two fields have a combined 2P crude oil reserve of 9.6m barrels and may be worth a best value of about US$195m based on 10% discount rate. The value will grow to US$222m if the existing agreements expire in 2028.



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Following our previous report on the Indonesia Oil E&P Sector (Value within the “Old Well” Programme, 7 May 2014), we decided to take a deeper look at Giken Sakata (S) which had recently acquired a 53.7% stake in Cepu Sakti Energy Pte Ltd. The latter focuses on producing oil from mature oilfields in Indonesia under the local co-operative agreements. Such contracts have several investment merits like
1) the exploration risk is lower,
2) the capex per well is only about US$150k,
3) the profit margin is higher relative to traditional PSC/KSO contract,
4) relative short payback period of less than five months and lastly
5) the model is replicable and there are currently about 14,000 of such mature wells in Indonesia.
If Cepu is able to execute its strategy well and able to extend its assets’ operating rights and secure new operating rights, we reckon that Giken may be worth about S$0.450 per share. Potential Gem.