What determines the earning for PETRONM?

What determine the earning for PETRONM?

Posted some simple analysis on Petron Malaysia back in Feb 2017 when it was RM5.00.
http://bullseyebursa.blogspot.sg/2017/02/petronm-what-to-expect-in-q4-2016.html

Today price is at its all time high RM 12.70. Congratulations and Well Done to all those who stay loyal to the stock until today. 154% profit!!

Q3 result is coming soon! Let's go deep and understand what really determines the earning for PETRON

As we all know, PETRON Malaysia has 2 businesses - Retail business & Refinery.

Retail Business

Many confuse the earning of PETRON or HENGYUAN (Refinery stock) with the weekly fuel retail pricing announced by Malaysia government. 

First, we have to understand the APM (Automatic pricing mechanism) introduced in Malaysia and MOPS (Mean of Platts Singapore).

Below are 2 very good write-up
https://syukrishah.wordpress.com/2015/03/01/automatic-pricing-mechanism-apm-and-mean-of-platt-singapore-mops/
https://paultan.org/2009/02/15/how-fuel-prices-are-calculated-in-malaysia/

Simply put, 
If somehow during the 1 week period, the cost is higher than the fixed price, Gov will subsidize.
If the cost is lower than the fixed price, Gov will be tax up to 58.62 cents.
Still the price will maintain at the fixed retail price at the current time. Thus this is how the APM work.

So, dealer (Petrol Station) usually earns a fixed profit margin (around 5c to 10c per liter) of the fuel as retailer margin and operational cost are already factored in the fixed price announced. 

Hence, the price of the weekly announcement has little impact to the profit of petrol station. Instead, volume is more important for petrol station to be profitable. 

Refinery Business

For refinery, the business profitability really has nothing to do with weekly pricing or MOPS. If yes, when crude oil price was > 100 USD, all refinery companies would have a lot more profits, right?

The answer is Crack Spread
https://finance.yahoo.com/news/crack-spread-101-part-1-150706378.html

What is crack spread? It is nothing but the profit margin for each barrel refinery firm would earn..

Essentially, refiners take crude oil (which generally can’t be used in its raw form) and turn it into refined products such as gasoline, diesel, and jet fuel. The crack spread represents the price difference between the finished, refined products (which translate into refiner revenues) and the price of crude oil (one of the primary factors in refiner costs). Because commodity prices can be incredibly volatile, refiners’ margins can too.

How is the crack spread doing recently. Pretty amazing. Jun to Sep (Q3), Sep to Today (Q4) is every higher than Q1 and Q2. 

No wonder both HengYuan and Petron share price has up so much.

All time favourite question : PETRON or HENGYUAN

I would definitely prefer Petron over Hengyuan

1) net cash company thus safer, dividend and more gross profit translating to net profit

2) good track records of profit

3) my personal prejudice against company of certain nation due to number of corporate governance deficiencies cases we have seen in the past.

4) Diversity of business model : Refinery business may not be evergreen. Retail fuel business is and generally it is recession proof.

PETRONM: What to expect in Q4 2016

PETRONM (Petron Malaysia): What to expect in Q4 2016

Petron Malaysia (PETRONM) 

1) Business background

The oil and gas industry is usually divided into three major sectors: upstream, midstream and downstream. The upstream oil sector is commonly known as the exploration and production sector which is also the one suffering when oil price drops.

PETRON is in mid/downstream business.
It sells processed petroleum product which is the main source of energy still in Malaysia/ South East Asia.
It is in a very different ball game from upstream. When oil price drops, profit margin actually increases as retail price of petroleum drop is not as huge as the crude oil. 
This can be seen as the profit picks up since Q1 2015.

2) Competition: PETRONAS DAGANGAN (PETDAG)

PETRONAS DAGANGAN (PETDAG) which is in the same industry, is trading at P/E 30, dividend yield 2.5%

It should not take long for market to realize PETRON is a better option with P/E at 9.5 today and dividend yield at 4%

3) Fundamental Valuation, Financial Analysis

Historical EPS

1Q15	2Q15	3Q15	4Q15	1Q16	2Q16	3Q16
21.05	27.18	27.47	6.02	6.15	22.79	17.22

Currently priced at 5 dollar, PETRON trailing P/E is at about 9.5. (last 4 quarters earning is 52.3 cent)
That is assuming Q4 2016 to be same as Q4 2015 which is not the case.
In Q4 2015, there was a 40-day mandatory maintenance at its Port Dickson Refinery. This is a activity mandated to perform maintenance once in several years.

PETRON hit RM 7.31 in Jan 2016 before the disappointing 4Q 15 result is released.

Perhaps investors were expecting a consistent results after posting 3 consecutive quarters of >20cents profit.

This coming quarter result Q4 2016 is a very interesting and highly anticipated quarter for PETRON as investors seek to see if PETRON can answer the below questions.

1) Can PETRON deliver 20 cents per quarter amounting to ~80 cents EPS?
There was a doubt in Q1 2016 where EPS is only 6.15 without any specific reason. Hopefully the management could exercise some form of risk management to ensure consistent of 20 cents per quarter.

2) PETRON dividend for 2015 was 20 cents. Can PETRON give more than 20c what was declared in 2015 given the strong Free Cash Flow?

If PETRON could give a good answers to the above 2 questions in the coming quarter results. PETRON would easily deserve a P/E of at least 15.

Assuming Q4 2016 EPS 20 cents. Total earning will be 66.15 cents. P/E 15 means 9.92 dollar

Disclaimer:
This is not a buy or sell call. Writer do own the shares of PETRON at the time of publishing.
Please read the disclaimer on the right side of the blog