Petronm: A Simple Math, 5x PE even after the 100% rally YTD?

First, I would like to congrats to all the shareholders of Petronm who do not sell the shares due to oil price volatiliy. The coming quarter results will be a reward to the believers. As some of you may have aware, Petron Corp (the parent co of Petronm) has released a press statement on 8 May 2017 and mentioned that net income from Malaysia operation in 1Q17 surged 335% to Peso 1.5bn. Many are guessing the profit that the listed co, Petronm will report in the upcoming 1Q17. Well, let me try to solve this simple math.

1) Peso 1.5bn = RM130m net income in 1Q17, given that Petron Corp didn't mention this is net income after minority, we can safely and conservatively assume this is the Malaysia operation net income before minority.

2) 335% yoy increase implied 1Q16 net income from Malaysia operation = Peso346bn or about RM30m

3) Both of these numbers include 2 non-listed sister co that Petron Corp owns in Malaysia, hence, we need to figure out how much is the profit belongs to the non-listed entities.

4) Petronm reported RM16.6m net income in 1Q16, as a result, non-listed sister companies should have contributed RM13.4m in 1Q16.

5) Given that the 2 non-listed sister companies are in fuel marketing and retailing biz, it is safe to assume that the profit growth is likely to be very steady, rise according to the volume + some margin improvement due to operating leverage. As Petron Corp mentioned Malaysia sales volume +6% yoy in 1Q17, we can assume 10% net income growth for non-listed sister co for 1Q17, which probably works out to about RM15m profit.

6) If you minus RM15m out of RM130m net income reported by Malaysia operation, we can get a profit estimate of RM115m for Petronm in 1Q17, this is a whopping 7-fold increase from 1Q16 and another quarter of RM100m profit!

7) I understand that the crack spread is still relatively stronger qoq in April and May to date. If this sustain throughout the 2Q17, we will probably see another RM100m profit in 2Q17, paving way for Petronm to achieve net cash position and record profit in 2017. Initially I was looking at RM300m profit in 2017, but now it seems to be easily beaten if Petronm can achieve RM200-230m profit in 1H17.

In conclusion, I think there is still plenty of upside from current share price, even though the stock had a good rally YTD (almost 100%). At 5x PE (assuming RM400m profit, +63% yoy), I personally think this stock is too cheap to sell.



PETRON Corp's Media release entitled "PETRON POSTS RECORD QUARTER, HITS P5.6 BILLION IN NET INCOME".

Market leader Petron Corporation continued its strong momentum in the first three months of 2017 posting a consolidated net income of P5.6 billion – the highest quarterly income in the company’s history – double the previous year’s first quarter earnings of P2.8 billion. Net income from Philippine operations grew 69% to P4.1 billion and accounts for 74% of consolidated figures while income from Malaysian operations surged 335% to P1.5 billion.
Petron’s exceptional performance in both markets is mainly due to its strong focus on more profitable segments, production of higher-margin fuels and petrochemicals, and aggressive market expansion.
In the Philippine retail segment, Petron’s volumes grew by another 6% while its LPG and Lubricants businesses grew by 5% and 16%, respectively. Currently, Petron has the highest network count with about 2,300 service stations – more than its next three competitors combined – which retail its cutting edge fuels and serves as outlets for its other products and services.
Petrochemical export volumes more than doubled over the period allowing Petron to capture better margins from benzene, toluene, mixed xylene, and propylene. Meanwhile, exports of fuels were lessened as more volumes were sold locally as part of the company’s strategy to optimize margins.
The company’s Malaysian operations also experienced steady growth with domestic volumes growing by another 6%, fueled by double-digit growth from the Commercial and Lubricants sectors.