Hengyuan (TP: RM17) - BULLISH Q4FY17 OUTLOOK!

2QFY17 Profits: rm84.41m (plant underwent minor turnaround for its smaller crude distiller)

If u take notice, you will realize the Brent Crude difference (Q4FY17 vs Q4FY16) is actually much larger for Q4FY17, compared to the difference in Q3FY17.

As there is some correlation of Hengyuan's profits to crude oil prices,it is key to monitor its movement. Hengyuan did very well for Q3FY17 underpinned by higher prices of market traded refined products amid hurricanes in the US and Mexico, and fire incident in a European refinery.

As for Q4FY17 outlook, Brent Crude Oil has settled above $50 / barrel for October and November. We would need to monitor Brent Crude Oil price movement for the remaining days of December to have a better overall picture. So far Brent Crude is well supported above $60 / barrel due to OPEC / NON-OPEC extending its production cuts deal till December 2018 with the inclusion of Libya & Nigeria, Forties Pipeline shutdown, declining crude inventories in the US. Let us hope Brent Crude can settle above $60 / barrel for the rest of December.

Product cracks continue to improve, holding steady above $9 / barrel in November & December ($5 to $6.50: Q4FY16). I am aware there are many other crack spread to refer, but I would just use this as a reference. Please conduct your own due diligence.

As you notice above, Hengyuan's Q3FY17 profits improved significantly was partly contributed by the strengthening of the RM against USD.

RM further strenghtens against the USD in Q4FY17, as compared to Q3FY17. Foreign currency translation gains should do better in Q4FY17.

4) Valuations:

With higher Brent Crude oil price, higher crack spread, stronger RM against USD for Q4FY17 as compared to Q3FY17, Hengyuan Refining company profits should be able to do better than Q3FY17. However, I prefer to be conservative, hence if Hengyuan is able to record rm300 million net profits for its 4QFY17 (rm207m, 4QFY16), its immediate 4 rolling quarters Earnings Per Share (EPS) would stand at rm3.42. With a Price Earnings Multiple of 5x (conservative estimate), Hengyuan should be trading at rm17.09 per share. From current price of rm14.30, there is 19% upside for this stock.

PE 5x is very conservative, noting the fact that Petron Malaysia is trading at PE8.5x, Petronas Dagangan at PE15x, Petronas Chemicals at PE14x, Petronas Gas at PE18x. Any re-rating would be a further boost to the company, and could trade well above current target price of RM17 per share.

Any downside risk would be the fall in crude oil prices, product cracks and mishaps / maintenance shutdown in its refinery plant in Port Dickson. Further downside risks would be a deep surge in US Oil Production that would flood the market with crude oil supply.

On a another note, Petronas Dagangan produced good financial result, netting rm761m in net profits for its 3QFY2017, y-o-y jump of 206%. In addition, Heng Yuan Refining also perform well for its 3QFY2017 result, with rm361m profits, y-o-y jump of 547%. I would like to congratulate Petronas Dagangan, Petron Malaysia Refining & Marketing & Hengyuan Refining company shareholders. May all of us end the year 2017 well.

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Disclaimer: The above is for educational purposes only, please conduct your own due diligence before buying / selling a stock. You may contact your personal investment advisor for investment advice.