Extract of Analyst Report from RHB

Petron Malaysia

Fuel Happy

We initiate coverage on Petron with a BUY recommendation. Our TP of MYR16.20 (60% upside) is based on a 12.5x FY18 P/E. The company owns over 580 service stations nationwide, distributing gasoline, diesel and LPG products. Petron also owns an 88,000bpd refinery in Port Dickson, Malaysia with a Nelson Complexity Index of 3. We believe the refinery would provide the company with a competitive advantage, thereby enabling it to take advantage of refined product spreads.

Third largest retail station operator in Malaysia. Petron Malaysia (Petron), a major fuel retail distributor in Malaysia, has the third largest market share in the country behind Shell and Petronas Dagangan (PETD MK, NR). It owns over 580 service stations nationwide, distributing gasoline, diesel and LPG products.

Besides retail marketing, the company also owns an 88,000bpd refinery located in Port Dickson, Malaysia with a Nelson Complexity Index of 3. The refinery is capable of producing gasoline, diesel, liquefied petroleum gas (LPG), kerosene and low sulphur waxy residue (LWSR). The refinery has an average utilisation rate of c.50% due to the unfavourable economics of LSWR which, in turn is due to its low complexity rate. The company is 73.4%-owned by Petron Corp, the largest oil refining and marketing company in the Philippines.

The refinery could provide alpha. Its retail fuel segment plays a volume game, ie the more retail stations imply a higher volume. As such, we expect its retail volume to grow by c.4% each year, driven by the opening of new stations. Our base case scenario assumes Petron would open 15 new stations every year. Its commercial fuel segment earnings are driven by spreads for naphtha, kerosene and LSWR. We expect spreads for naphtha and kerosene to range between USD2-7/bbl for the long term. As such, we believe the commercial fuel would provide the company with a higher earnings growth potential, compared to that of its peers.

Healthy balance sheet. As of 1H17, it is a net cash company; we expect Petron to end FY17F in a net cash position. Total borrowings are at MYR66.4m, while its cash position is at MYR156m. This is comparable to the situation at the end-FY16, when it was in a net debt position of MYR136m. Net cash from operations and free cash flow has been on an increasing trend, attributed to better cost management as well as the asset performance mechanism (APM), which transmits changes in oil prices to retail fuel prices.

BUY. We initiate coverage on Petron with a BUY recommendation, supported by a TP of MYR16.20. We arrive at our TP by pegging a 12.5x P/E to FY18F EPS of MYR1.30. As a comparison, Petronas Dagangan is trading at 24.6x P/E for FY18, at a 70% premium to Petron. We like Petron as we believe its retail fuel segment would provide a stable base of earnings due to the APM mechanism, while its commercial fuel segment would provide an earnings boost, an advantage the company holds over its peers due to its refinery.

Judging from the last quarterly, the improved cash flow from operations > 120m, increased revenue reserves > 140m & massive drop in borrowings > 241m ... this co if it maintains performance, the sky's the limit.

Waiting with eager anticipation for the Sep quarter results!

Agreed that HR Owen is an odd and non-compatible investment

Anticipating with glee the usual big dividend announcement in Sep quarterly. Unfortunately it's a long fuse that is paid only in Mar 2018.

What huge volatility!!

There should be a run up in the share price just before it turns ex.

I think what the fund managers who are trying to pick up large stakes in this Co for cheap is to lull the shareholders into believing that the actual share value & interest in it is low.

Just when you think the price will not appreciate & are willing to throw at small price increments, it springs a surprise resulting in the opportunity loss for those who have discarded the shares.

I did not realise that the results were announced much earlier on 24 Aug

I doubt it'll make any difference but if the government is serious in collecting as much gaming revenues as possible then it's about time they got really very strict on this.

It may trade lower but the quarterly results I believe will vindicate & support higher prices.

All quiet on the battle front.

Waiting for it to take-off from 10.30

waiting with trepidation the latest quarterly. Any guesses?

I recently went through my old contract notes dating back to 2007. I saw trades done at 5.05 and other prices in the vicinity.

Looks like something's rumbling

I expect mediocre results. I've sort of given up on this counter.

My first foray into BToto, I made quite a bit of money. My 2nd despite entering at a much lower price has been a total disaster.

So now I just don't bother. Simply count my blessings for any dividends given.

Toto has too many shares. It should buy back when it's cheap & cancel them.

Petdagang 30 June 2017 & 30 June 2016 quarterly EPS was 24.80 & 21.60. Petron M was 33.70 & 22.80 which beat Petdag for both quarters.

Share price currently however is 21.56 vs 9.38. Comments anyone??

I made my biggest gain with AJI but I had deep regrets that the highest price I ever sold was a mere shade over RM10.

However if I had kept & collected more driven by greed, then today it would have been my Waterloo.

Despite being non-haram and despised, in FY 2014 for e.g. B. Toto contributed a total of RM800m in the form of gaming duties & taxes to the government which I believe was accepted with open arms.

If haram then better don't take the tax revenues - give it back to the shareholders. Where is the government going to get this sum of money if they stop it?

Is this steep drop a result of forced selling of speculative positions?

GICSpore - it's on the Petron website. I would not want to blatantly display the number.

The Co Sect, let me pre-warn you will say - "I would not want to reveal to you more than what has been released to the public..." - as if giving me an unfair advantage. This is despite the fact that I'm only seeking clarification on historical info not insider info. I ask him whether he would treat analysts and reporters that same - he said he would.

He should know that the best approach is to answer queries in a forthright transparent manner.
Some of these guys are just plain arrogant.

I just got off the line with the Co Sect. Wanted to find out more about the RM39.9m gain on service station divestment. He was very guarded with the information.

All he said was that it was in line with the MRT project. I think he mentioned 4 stations. Basically the govt wants to takeover the land, Petron has to agree.

Why should the govt compulsorily acquire service stations which Petron has painstakingly put up? Which stations did they acquire? Don't Petronas have enough stations?

Is it a case of someone takes all the risk and does all the hard work and someone else reap the benefits?

Wow what confidence "when" & not "if" good result is released

I hope it's the calm before the storm

Good la - it means that he's confident of the counter at these prices

i hope no bad surprises on the impending results

Yes dividends received

Anybody's got the balls for the warrant? Now with shares traded at 8.55, it's trading at 25.5 sen with a strike at 8.50 & expiry at 22 Feb 2018.

Markets are indeed truly unpredictable!

I was expecting a super-bull with 5 sen per litre increase in retail pump prices but it's going south. It probably overreacted a few days back.

Earnings should in all likelihood be in the neighborhood of the last quarter unless some big oversight in keeping records or deliberate cooking of the books.

Good thing is that TVT is buying

sigmax no eyes see.. should have sell earlier ..

I should have bought back later

The floor has fallen off

Khye Lock Tneoh RHB will do the necessary to recover the loss incurred in CB !! FYI - RHB nor any other bank issuing SW does not bet against their customers. Customers bet on price whilst the banks bet on volatility.

Oh yes - I stand corrected

I thought dividend payment is supposed to be today but no sign of it

Looks more like upside down V - haha

I saw the lackluster price movement in the morning despite the recent crude oil price trend & I sort suspected that there was more in store. Took a short afternoon siesta and when I woke up ... took some profit.

price movement seem to suggest an imminent good quarterly result in the offing... or pure trickery & manipulation to get others to buy this forsaken counter.

Looks like a gradual takeoff - i was thinking it would be vertical given its observed volatility

Houston! - we seem to have a problem lol

This is your captain speaking - Fasten your seat belts as the plane is about to take off

If they can maintain the quarterly EPS, then agreed with 10 as TP

Babu - TQ for your soothing insight. Agreed that Toto management is probably doing the best they can.

BTW I just learnt from Star report that Da Ma Cai (regulated by the Toto board) is allowed to accept online bets whilst Magnum & BToto regulated by Finance Ministry is not allowed - customers have to walk to the outlets. This is one big disadvantage.

I've got too many eggs in this bad basket.

share buy-back at 2.32 indicates management's confidence that the price is worth more. It's a good confidence booster to investors.