PETRONM (3042) - 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.
PETRONM (3042) - PETRONM: A 2.8x PE stock?
http://klse.i3investor.com/blogs/sumato88/116500.jsp
