You might have heard of the company Oceanus (SGX: 579) from your friends or social media platforms. This stock has delivered an impressive 700% returns over 2 months, matching the returns of Tesla and Bitcoin!
However, this gain did not last long, its share price has since tumbled from its peak of S$0.080 to S$0.042 (A 46% drop from its high within a month).
As this stock was gathering lots of attention, I was curious about its business fundamental and did some research on Oceanus. Here is what I have found.
What does Oceanus Group do?
Oceanus Group Ltd is a seafood supplier based in Singapore. The company has 4 main operations, namely aquaculture, distribution, services, and innovation.
The aquaculture segment is the centerpiece of Oceanus’ business. This involves the renting of land-based aquaculture farms located in China (Previously, Oceanus owns and operates the farm but has changed to this new model in which the company believes could reduce its risk). Apart from that, Oceanus also sells wild-caught seafood and processed marine products to its customers.
The distribution segment is involved in the distribution of Oceanus group’s farm marine product, mainly abalone and also its partners’ produce to its customers. As Oceanus changes its business model, we could see more revenue coming from this segment as Oceanus becomes a middleman between its producers and buyers.
The service segment mainly provides consulting solutions relating to aquaculture, marketing, and branding to third parties to boost the group’s profitability.
The innovation segment focuses on developing cutting-edge technology which could boost Oceanus’s marine product yield and quality.
Oceanus Group’s woes
So why is the share price so low before the huge spike? We have to go back to 2012, in which adverse events caused the mass deaths of its abalone supply. With Oceanus’ main business being focused on abalones, it resulted in halt of operations that lead to a net loss of over S$90 million. In the end, they had to default on their debt of S$94 million and take up a negative net asset position of S$66 million.
Since 2015, there was a change in management.
Peter Koh was appointed as the group’s CEO in late December 2014. He has been instrumental in turning Oceanus business around through diversification and expansion of the group’s business model beyond farming. In 2017, the group had successfully restructured its debt of S$94 million and became operationally profitable.
Moving forward, Oceanus will be focusing on ‘deep tech strategies’ to supplement its business. An example would be Oceanus group’s investment in Universal Aquaculture, a newly formed deep tech company with an indoor farming facility that could help develop in-house technology with a low CAPEX business model for Oceanus.
Why did their share price spike?
Apart from the FOMO, Oceanus does have some good reasons for its recent rise.
This includes the improvement in earnings and also the lowering of its debt in recent years.
Apart from there, there are also some potential catalysts which I would discuss below, that could propel the stock price further in the near term.
Improved revenue and earnings
Due to the negative earnings, Oceanus’ share price had remained low previously, trading within the range of $0.003 to $0.020 between 2014 to mid-2020.
However, with improved quarter-to-quarter earnings over the recent years and the fact that they have become profitable once again, investors are gaining back their confidence in buying this stock which resulted in its share price shooting up to its peak of $0.080, presenting a 700% rise.
Low debt
Ever since restructuring its debt of S$94 million in 2017, Oceanus has managed to keep its debt level low.
From its latest financial report 2020 (unaudited), its liabilities are around S$28 million. With an Earnings before interest and tax (EBIT) of S$6.05 million, the interest payment on its debts is well covered by 6.6x.
Potential catalysts that could propel Oceanus’ price further
Exiting from SGX watchlist
SGX operates a financial watchlist. Companies that record 3 years of consecutive losses and have their market capitalizations fall below S$40 million, will be placed on that watchlist.
For such reasons, Oceanus has been on the SGX watchlist. However, with the profitability in recent quarters, Oceanus is on track to fulfil the condition to exit from the SGX watchlist.
This move could increase the confidence of investors and potentially boost Oceanus share price.
Credible figure as board member
Dr. Yaacob bin Ibrahim recently joined Oceanus as an independent director in late 2020. For those not very involved in the political scene, Dr. Yaacob bin Ibrahim was a former member of PAP, the governing party in Singapore. He has served various ministries with the more notable ones like Minister for Communications and Information and Minister for the Environment and Water Resources. With him on the board, it could further boost Oceanus’ credibility and strengthen its corporate governance. Increasing investors’ confidence in the company.
Oceanus’ Risks
Before you place your order, here are some risks that you should take note of before investing in Oceanus.
High level of non-cash earning
When a company records a profit, it does not necessarily mean they have received the money. As such if you were to look at Oceanus’s balance sheet, between 2019 to 2020, its cash and bank balances drop from S$17 million to S$11.5 million.
On the other hand, its trade receivables increased from S$1 million to S$16 million. If this were to keep up, it would be unsustainable for the company. With lesser cash on hand, Oceanus will be limited in its future growth due to limited free capital for investment or growth.
*Trade receivables are the amount owed to the company for goods or services it has sold but has yet to receive the payment from its clients.
Volatility
In 2021 alone, the company has received a total of 3 SGX queries regarding the companies trading activity. The company was not aware of any information not previously announced concerning the company, its subsidiaries, or associated companies which, if known, might explain the trading.
This shows how volatile this stock is, its price can fluctuate significantly without any fundamental reasons.
Valuation
With a Price to Earnings ratio of 109x, Oceanus Group is way over-valued compared to its peers.
The average P/E ratio of the consumer staples sector which comprises of businesses in the distribution of food, is only 29x. This suggests how overvalued Oceanus is currently.
Low profitability
Although Oceanus is still restructuring their business, however, by looking at its current operating margin, it is not that rosy.
Comparing Oceanus Group’s profitability to the industry average, the operating margin of 3.97% is relatively low compare to the industry’s 6.4%. What this means is that Oceanus is receiving much lesser in profit as compared to its peers which could signify either a competitive industry, inefficiencies in the company, and/or lack of pricing power.
Negative operating cash flow
Operating cash flow measures the amount of cash generated by a company from its business operation. A company with positive cash flow would be able to maintain and grow its operations without external financing needs.
In the case of Oceanus, their cash flow has been negative for the past 3 years. With a negative operating cash flow, Oceanus has to finance its business and capital expansion from other means either from the equity or debt market.
Will I invest?
If you are thinking of buying Oceanus, you must believe that CEO Peter Koh can continue to turn the business around. With a 10% stake in Oceanus, it is great that Peter Koh’s skin is in the game and he would be aligned with other shareholders.
Looking forward, the company aims to expand into high-tech farming with a regional presence. Oceanus has invested in Universal Aquaculture, which has developed a novel shrimp farming facility in Singapore. Another agreement with Hainan Raffles group aims to set up the world’s first Oceanus food tech hub in Hainan, China which will be a key aquaculture centre for shrimp and fish farming in the region.
Back in 2010 before all the problems the company face, its share price was trading around S$0.30, will it go back to its heyday? I am not sure as all this will depend on the way the company moves forward in an uncertain economy.
Since the share price is too volatile for my likings, and a lack of data to show how the company would do going forward, I would be watching at the side-lines for now.
I currently do not own any share in Oceanus.
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Good analysis