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CEFC International Ltd’s Stock Has Gained 1,200% Since July – Should Investors Be Buying Now?

CEFC International Ltd (SGX: Y35) appears to be getting plenty of interest from stock market participants in Singapore lately.

The company’s shares, which had never closed at more than S$0.10 apiece since at least the start of 2009, has rocketed by 1,200% from S$0.025 at the start of July 2015 to S$0.30 yesterday.

At S$0.30 per share, CEFC International has a market capitalisation of S$1.2 billion. Is the 12-fold increase in the company’s share price justified?

Charting the spike

CEFC International, which is involved with the trading of petrochemical products, had been turning in nondescript business performances over the past few years. For instance, its net income in each year from 2011 to 2014 had never exceeded US$1 million (the firm even clocked a loss in 2011).

On 7 July 2015, CEFC International announced in a short memo that it was in discussions on potential joint ventures but there had been no definite deals yet. The key part of the announcement read as follows:

“The Board of Directors of the Company (the “Board”) wishes to announce that the Company is engaged in discussions with a third party to acquire equity interest in a company that currently owns a floating storage tank. The Company is also in discussions with a consortium to acquire equity interest in a company that is currently engaged in the construction of certain port facilities and cargo transportation in China (together, the “Potential Joint Ventures”).”

That announcement more or less kick-started the rally, with CEFC International’s shares ending the month of July at S$0.315 each (keep in mind that the stock was at S$0.025 merely four weeks ago). From 7 July 2015 to 31 July 2015, there had been no significant announcements apart from the release of the firm’s  earnings for the fiscal second-quarter. For the record, that earnings release had nothing impressive, with CEFC International’s quarterly revenue falling by 46%.

In the month of July, bourse operator Singapore Exchange had, on a number of occasions, questioned the company on the trading activity of its shares. There was also a “Trade with Caution” that was issued by Singapore Exchange in relation to CEFC International’s shares.

A new future….?

On 10 August 2015, CEFC International announced that three different companies had proposed a private placement deal which would see the petrochecmicals trader issue 705.5 million new shares of itself at S$0.35 per share. The influx of new capital (nearly S$247 million in gross receipts),  would significantly strengthen CEFC International’s balance sheet given that its total assets as of 30 June 2015 was at only US$15 million. The private placement was eventually done early last month on 4 September 2015.

Then on 8 September 2015, CEFC International announced a framework cooperation agreement with CEFC Shanghai International Group Limited (CSI), which is part of the CEFC China Energy Company (CCE). Under the agreement, CEFC International will become the exclusive trading platform for all of CSI’s overseas procurement and supply activities with regards to crude oil, refined petroleum products, and other related commodities.

CEFC International expects the partnership to be a game changer for its future prospects as it can bring in substantial trade flow in the future, thereby improving revenue and profit.

Just yesterday, CEFC International then announced its fiscal third-quarter results. The numbers were great. CEFC had experienced a 73% year-on-year jump in quarterly revenue while its profit had spiked by 1,711% to nearly US$12 million.

But… the sums don’t seem to add up

Interestingly, less than a month had passed between 8 September 2015 (the date of CEFC International’s partnership announcement with CSI) and 30 September 2015. And yet, CEFC International had managed to see such a big improvement in its business – perhaps, the partnership between CEFC International and CSI had really improved the prospects of the former significantly. CEFC International, with a net profit of US$11 million over the last 12 months and a book value of US$190 million, might very well be worth S$1.2 billion.

But here are some questions running through my mind throughout this whole saga:

  1. Why did CEFC International’s stock surge 12-fold even before any deal was remotely close to being finalised?
  2. Why did the investors in the private placement deal choose to pump capital into CEFC International after the firm’s monster rally but before any finalised deal had been announced?
  3. The investors in the private placement were not on CEFC International’s 20 largest shareholder’s list in the 2014 annual report. It’s thus safe to assume that the private placement investors did not have close links to the operations of the company. If that is the case, why did they not mind paying a price for CEFC International’s shares that was 12 times more as compared to the prevailing market price just three weeks ago?
  4. If those investors were investing based on how CEFC International’s business was developing, wouldn’t it make more sense for them to pounce only after some concrete deals were inked?

These are all questions investors may want to think about as part of their due diligence when evaluating CEFC International as an investment opportunity. And did I mention earlier that the Singapore Exchange had issued a “Trade with Caution” on CEFC International’s shares? Oh yes – I did.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.