Buying Biz or Buying Stock?
PETRONM: A 2.8x PE stock?
Petronm reported RM111m profit in 4Q16, bringing its full year profit to RM238m!!! As I analyze in my previous write up, there is no reason why Petronm can't report good results in 4Q16 as all the key earnings drivers are in its favour.
What is more commendable is its continue improvement in free cash flow, from RM249m in 2015 to RM341m in 2016, translating to 27% free cash flow yield! This allows the company to declare RM0.22 dividend per share (4.8% yield) to reward shareholders, setting a record for consistent dividend payout (Petronm started paying dividend in 2015 (RM0.20 dps) after the new management successfully turnaround the company within 3 years since it took over in 2012). I think consistent dividend payment is important as it always served as a strong rerating catalyst for share price as market tend to be more confident with management that are willing to share the company's cash flow with the shareholders.
While the company declared higher DPS, Petronm also managed to further reduce the net borrowings from RM290m in 2015 to RM135m in 2016. At this pace, the company is very likely to turn net cash in 2017. Operationally, the company continues to gain market share with 6% sales volume growth in 2016 as compared to the market leader, Pertronas Dagangan who recorded +2% volume growth in 2016.
So what's next? Shall we annualize 4Q16 profit of RM111m to derive our forecast for 2017? This may sound a bit crazy but if Petronm can really deliver RM444m profit, the co is trading at 2.8x PE for FY17 which is a no brainer All-in stock. To be frank, I do not know if Petronm can really deliver RM444m profit in 2017, it is all up to the 3 key earnings drivers that I explain before, i.e. 1) crack spread, 2) crude oil price which will have an impact on inventory gain/loss, and 3) USD exchange rate (after 4q16 results which defy the historical trend, I think this factor now play a less important role in Petronm's profitability).
But what I am quite certain and confident is its 1Q17 results should be equally strong if not stronger, as 2 of the key earnings drivers are still in Petronm's favour. As I mentioned before, crack spread year to date is stronger than the average in 4Q16 (usd7/bbl), currently at about USD9/bbl according to my friend who works in the industry. If the trend doesn't reverse meaningfully (which my friend believe so), I am pretty sure that the crack spread/processing margin will be stronger in 1Q17. This coupled with the fact that YTD crude oil price (USD55/bbl) is higher than the average crude oil price of USD50/bbl in 4Q16, we pretty much can conclude that 1Q17 will be equally strong if not stronger.
If Petronm does deliver another RM111m profit in 1Q17, that will made up 37% of my conservative full year profit forecast of RM300m (EPS- RM1.11). By applying 10x PE for the company, the TP will be RM11.10, giving you a whopping 140% upside from RM4.63!
To note, Petron Cop, the parent co of Petronm is trading at 15-16x PE now.
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Petronm: A 6x PE stock generating 30% ROE with a clean balance sheet!
Created by sumato88 | May 25, 2017
Discussions
1 person likes this. Showing 26 of 26 comments
Hard sell ar? Still Sumato gogogo. Bravo. Reborn esso definately better in reducing debt. Government removal of fuel subsidy remove the price ceiling bully factor on all refinener. Gogogo
2017-02-23 00:02
Thanks for the article
1. USD appreciate does hit them as expected, this is consistent with what they guided in annual report. but the increase in revenue and GP margin just blew all these away
2. is it possible for your friend to share which crack spread does M'sia companies like Petronm relies on? I tried looking at various crack spread and so far Petronm results seems to have higher correlation with the European ones rather than the Asia Tapis one
2017-02-23 07:39
Hi, Jay
1) USD appreciation does have negative impact to them if they never do hedging. If you look through the past 10 quarters, the co tend to record unrealized, realized and derivative gain when USD appreciate. So that's the positive impact that I refer to. However, 4Q16 they report forex/derivatives loss, so I think the crude oil hedging derivatives was the culprit. Anyway, all these are well covered by the expanding crack spread and crude oil inventory gain in the quarter.
2) Tapis crack spread is the crack spread that Malaysian refineries use, according to him.
2017-02-23 08:11
I think only the industry website will have, but u need to subscribe the service. Another indication is our petrol price that government release every month. Just like the Feb price where we have a petrol price hike even though the crude oil price was stable mom.
2017-02-23 09:15
dont simply take this article for buying Petronm. You will need to have to look at EPS growth rate and PATAMI full year to take the assumption on the price target.
EPS year on year actually drop 5%. Nett profit only grow 7% year on year. I would rate it to SELL on Rally.
2017-02-23 09:55
thanks sumato88
although I find the correlation between tapis and petron's results weaker, shall dig more into it.
2017-02-23 09:58
Another thing , by using simple PE multiples you are able to more or less predict the price of a stock. The last time PetronM traded at 10 times PE is in year 2007. Bull Run period before collapse. so my 2 cents worth. If assumption PetronM is trading at 6.50x multiple which is fair. The stocks should be price around $6.50 which does not give much of upside. the only positive catalyst is EPS growth assumption which only GOD knows! so Fire your ##@$ analyst
2017-02-23 10:36
xcelcap, I might have different opinions, for this company you based on EPS, historical PE, now we are talking around RM300m FCF each year (if can maintain) turn out to RM1.12/share, what a mind blowing cash cow, not many bursa companies can do that....
2017-02-23 14:48
up to you to hold. for me i will sell on rally. clear all my position today..bye....
2017-02-24 16:57
you are right wltan22, TTM cash yield at 18% (using current price of 6.09). Even at 25% payout your dividend yield is at 4.5%.
And the above is without taking consideration on the latest qtr developments due to phenomenal growth in Sales, and price differential between current finished product - locally due to government policy vs crude price.
If recent qtr results are repetitive...then definitely upside is another 100% at the least.
I am confident the crude price wont move up further...it can only go down due to Iran exports and our government will only keep raising the petrol price.
Posted by wltan22 > Feb 23, 2017 02:48 PM | Report Abuse
xcelcap, I might have different opinions, for this company you based on EPS, historical PE, now we are talking around RM300m FCF each year (if can maintain) turn out to RM1.12/share, what a mind blowing cash cow, not many bursa companies can do that....
2017-02-24 21:08
and if they can eliminate the finance cost (easily done with a year's cash flow), thats another minimum 10% upside.
2017-02-24 21:16
@probablity, agreed, don't forget they are Philippines owned company, if days be net cash company, the dividend only can go up, not go down...
2017-02-24 21:24
that's the beauty of the market, we can't get all the people agree with us, stay true with your understanding, everyday got sell and buy... haha
2017-02-24 21:28
thats a very good point wltan22...on dividend payout policy.
may be they are waiting for RM to strengthen against dollar or at least against Peso..
http://www.xe.com/currencycharts/?from=MYR&to=PHP&view=1Y
when RM strengthens , petron business or profit in terms of RM would not change (i think it improves for the same crude price in dollar) but the dividend value in dollar makes a big difference to Owners.
2017-02-24 21:34
just wait and see, to me this company is one of the most undervalued company in Bursa, my2cent
2017-02-24 21:39
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Nicely written...
2017-02-22 23:56