Assessing AP Oil International's Earnings Sustainability and Valuation Potential

The recent performance of AP Oil International (SGX:5AU) presents a paradox: while its 2024 financial results show a dramatic improvement in net income and profit margins, historical trends reveal a long-term decline in earnings per share (EPS) and profitability. This divergence raises critical questions about the sustainability of its recent gains and whether the company is overcoming structural challenges or merely navigating temporary headwinds.

Earnings Trends: A Tale of Two Periods

AP Oil International's 2024 results marked a sharp turnaround, with revenue rising 18% to S$54.7 million and net income surging 293% to S$2.06 million, driven by a jump in profit margins from 1.1% to 3.8%. However, this improvement follows a decade of stagnation. From 2020 to 2023, the company's EPS declined at an average annual rate of -15.2%, dropping from S$0.007 in 2022 to S$0.003 in 2023. Even in 2024, the EPS of S$0.012-while a 300% increase from 2023-remained below the S$0.017 recorded in 2021. By the first half of 2025, EPS had stagnated at S$0.005, matching the 2024 level.

This pattern suggests that the 2024 rebound, while significant, may not reflect a durable recovery. The company's profit margin improvement was partly offset by a S$280,000 reduction in statutory profit due to unusual items. While these expenses are likely non-recurring, their absence in prior years raises questions about whether the 2024 gains were driven by operational efficiency or one-time adjustments.

Structural Challenges and Strategic Shifts

The company's 2024 results also hint at broader structural issues. Despite the revenue growth, AP Oil International's return on equity (3.6%) and net profit margins (3.8%) remain modest compared to industry benchmarks. Moreover, the company has announced structural changes to align with evolving market demands, though details remain opaque. Without transparency on these initiatives-such as cost rationalization, diversification, or technological upgrades-it is difficult to assess their potential to drive long-term value creation.

The lack of clarity is compounded by the company's historical reliance on volatile revenue streams. For instance, its 2019 earnings growth of 21% contrasted sharply with the subsequent multi-year decline, underscoring the fragility of its business model. If the 2024 improvements stem from temporary factors (e.g., favorable market conditions or one-time cost savings), investors may face renewed risks in the coming years.

Valuation: A Discounted Opportunity?

AP Oil International's valuation appears attractive at first glance. Its trailing price-to-earnings (PE) ratio of 11.13 is below both its industry peers' average of 11.7x and the Asian Chemicals sector's 21.7x. Additionally, its market capitalization of S$22.71 million is dwarfed by peers like China Sunsine Chemical Holdings (S$753.2m) and LHT Holdings (S$47.1m). This valuation discount could reflect skepticism about its earnings sustainability, but it also presents an opportunity for investors who believe the company's structural changes will unlock value.

However, the company's low market cap also highlights its limited scale and resources. With a debt-to-equity ratio of 0.08 and a current ratio of 5.52, AP Oil International maintains a strong balance sheet, but its ability to fund growth initiatives or weather economic downturns remains constrained. For a company operating in the cyclical oil and chemicals sector, this could be a critical vulnerability.

Conclusion: A Cautionary Optimism

AP Oil International's 2024 earnings rebound is undoubtedly encouraging, but it must be viewed through the lens of its long-term struggles. The absence of detailed information on structural reforms, combined with the recurrence of declining EPS trends in 2025, suggests that the company's recovery is far from assured. While the valuation appears undemanding, investors should remain cautious about overestimating the durability of its recent gains.

For AP Oil International to justify its current valuation, it must demonstrate that its 2024 improvements are rooted in sustainable operational changes rather than temporary factors. Until then, the stock may appeal to risk-tolerant investors seeking a speculative play on a turnaround story, but it remains a high-conviction bet rather than a core holding.