Is There Value in Oil and Gas Services?

The oil and gas services sector has long been a battleground for value investors, balancing cyclical demand with the allure of undervalued assets. Federal International (2000) (SGX:BDU), a Singapore-listed player in this space, has recently drawn attention for its low Price-to-Sales (P/S) ratio and a modest dividend yield. But does its recent earnings performance and valuation metrics justify a bullish case for income-focused investors? Let’s dissect the numbers.

Earnings Momentum: A Mixed Bag

Federal International’s Q2 2025 earnings report revealed a stagnant revenue of RM23.0 million, flat compared to the prior year. However, net income plummeted by 93% to RM104,000, dragging the profit margin down to a meager 0.5% from 6.6% in Q2 2024. This stark decline raises questions about the company’s cost management and operational efficiency. Despite these headwinds, the stock has gained 3.6% in the past week, suggesting some market optimism.

The disconnect between earnings and share price could stem from expectations of a rebound in the oil and gas sector. With global energy demand showing resilience and geopolitical tensions spiking crude prices, investors might be betting on a recovery in margins. Yet, Federal International’s trailing twelve-month (TTM) net profit margin of 4.23% remains underwhelming, hinting at structural challenges in scaling profitability.

Valuation Attractiveness: A Discounted Proposition

Federal International’s P/S ratio of 0.52, calculated using a share price of S$0.164 and TTM revenue per share of S$0.31, is a compelling figure. In the Oil & Gas Equipment & Services industry, the median P/S ratio stands at 1.61, meaning SGX:BDU trades at a 68% discount to its peers. This valuation gap is further amplified by its EV-to-Revenue ratio of 0.39, which ranks in the top 14% of 934 companies in the sector.

Such a low multiple could indicate undervaluation, especially if the company’s revenue base stabilizes or grows. However, investors must weigh this against the company’s earnings volatility. A P/S ratio below 1 often signals skepticism about future profitability, and Federal International’s net income contraction in Q2 2025 does little to dispel that concern.

Dividend Safety: A Question Mark for Income Investors

For income-focused investors, Federal International’s dividend profile is a double-edged sword. The company currently offers a 3.05% yield, calculated on an annual payout of S$0.005 per share. While this yield is attractive on paper, the payout ratio of 0.00% (due to a near-zero EPS) suggests that dividends are not being funded by earnings but rather by retained cash or asset sales.

Historically, the company’s payout ratio averaged 38%, but its 3-year dividend growth rate is 0.00%, and the yield is now near its 10-year low. This trend, coupled with a “Very Unsafe” dividend safety rating, signals a high risk of cuts or suspensions. The recent suspension of dividends for the six months ending December 2024 underscores this vulnerability.

Strategic Considerations for Investors

Federal International’s valuation metrics present a tempting entry point for those willing to bet on a sector rebound. Its P/S ratio of 0.52 is among the lowest in the industry, and its enterprise value of S$17.28 million suggests a low-cost opportunity if revenue growth accelerates. However, the company’s earnings weakness and dividend risks cannot be ignored.

For income-focused investors, the stock’s 3.05% yield is a lure, but its sustainability is questionable. A more prudent approach might involve using the low P/S ratio as a catalyst for long-term value creation rather than relying on dividend income. Investors should also monitor the company’s exposure to energy price cycles and its ability to reduce operational costs.

Conclusion: A High-Risk, High-Reward Scenario

Federal International (SGX:BDU) offers a compelling valuation story in the oil and gas services sector, but its earnings performance and dividend risks temper its appeal for income-focused investors. The stock’s low P/S ratio and enterprise value suggest potential for capital appreciation if the company navigates its operational challenges successfully. However, those prioritizing dividend stability should proceed with caution.

In a sector where macroeconomic factors hold sway, Federal International could be a speculative bet for those with a long-term horizon and a tolerance for volatility. For now, the key will be watching whether the company can translate its discounted valuation into sustainable profitability—and whether the market’s optimism proves justified.