Good article from felicity
http://www.intellecpoint.com/
Back in 2004, I remember I invested into a stock which would have
provided a 10 bagger. That stock was Digi - where at that point of time
after the acquisition of the telco from Vincent Tan by Telenor, it had
made a dramatic turnaround from losing market share and eating up
cashflow to drastically improving its cashflow until it was debt free
within 2 years. That Digi which was bought at RM5 during then has split
into 10 shares and many "x" of dividends. I of course being not very
clever, sold most of them off much too early although I made some good
returns.
That discovery will not come very often and once a while, I thought I
have seen some resemblance of the same kind of stock or company - but
either I was too slow and stupid to make decision or it actually created
a false sense of happiness. In any case, we do not need to find a 10
bagger but my believe is to continue to look for a stock which has that
similar track.
Petron is a stock which I stumbled upon when reading several comments on
the oil retailing stocks. Since then, and over the last 2 - 3 weeks, I
have taken an interest to understand the petroleum retail business after
at first looking at Petron Malaysia's financials for the first time (in
detail).
I am not an expert in oil and gas businesses, however I believe I am
good enough with my observation as well as investment research if I put
enough efforts to understand the business.
[I had a similar stock which I had bought - PDB probably back in 1996
(or sometime around then), I had the stock for around RM3. Again, I did
not wait long enough to reap its RM24 today (and a lot more of its
dividends). During then, also I was way too raw to understand these kind
of businesses.]
In mentioning oil and gas, actually Petron - unlike companies like Icon
Offshore, UMW O&G, Bumi Armada etc. etc. - is in a much different
type of business. It is in the retailing business which Lazada, Amazon
or 11street cannot replace. (It can be threatened by Tesla or BYD
though)
Just to get things started, what makes me spending time to look at
Petron is basically because of the below - its net cash or debt position
over a short period of time. Of course in investment, it is not as
simple as that, but the below signifies strong and consistent free
cashflow.
 |
| Net Debt improved dramatically from RM1 billion in 1Q14 to almost no debt now |
Before, we even look at numbers in detail - many would have (as well as
me), been wondering why would I invest into a Philippines controlled oil
and gas company where firstly the country does not even have a strong
O&G industry.
Then, as I have seen what really happened to BP (which turned into BHP,
under Boustead) as well as Projet (if anyone remembers - which was later
sold to Shell) - the same could happen to Petron. It is not an easy
business. This is not entirely a technology business but involves
operational execution strength and marketing - which is what San Miguel,
the parent company of Petron is strong at.
One may also say that Petron is also doing refinery then retailing.
Correct. That is one of the concerns, but it seems that it is able to
cope well. Its 88,000 barrel/day refinery in Port Dickson is smaller
than competitors like Petronas (obviously) and Hengyuan (bought from
Shell) at 156,000 barrel. However, it manages to bring back
profitability from the refinery - which is important.
What is questionable is that why was it Esso which sold the entire
business (refinery and retail) to Petron back in 2012 could not really
make much money from this refinery - but Petron could as it has shown
especially over the last 8 quarters.
 |
| Petron has turnaround from losses in 2013 - 2014 to strong profits over last few quarters |
Of course, when one questions oneself - if it could be such a good
business, why would Esso sell. And in that same period Shell sold its
refinery to Hengyuan while BP has left the country having sold the
retailing arm to Boustead. These are the oil majors leaving the country
in the downstream operations except for Shell and Caltex (owned by
Chevron) which keeps the retailing business.
That answer lies in them being "focused" and the Malaysian market being
not big enough. However, what is not big enough for Esso is big enough
for San Miguel. In the era of consistent and extreme competition, the
big giants can only focus on few things that they think they can be
better and make much more money than others. ExxonMobil, Shell and BP
are strong in exploration and pretty much the upstream business - an
area which not all players can be deemed to be good at. Beyond
technology, it is also involving geo-political relationship. Why would
then, a CEO of Exxon-Mobil be given a Secretary of State position...
At the same time, as many would know - this business is getting
challenged from the shale guys (using a different technology and
business model). They are also being challenged from the alternative
energy guys such as solar, battery technologies, wind, biofuel etc.
Hence, downstream, refining especially is the least of their problem.
It is like manufacturing to Apple and Google.
Petron actually was having a
similar deal back
in 1973 when Esso sold its business to the government of Philippines.
Today, Petron is the largest petrol station operator in Philippines with
40% of market share and operating 1900 stations. In Malaysia today,
Petron has close to 600 by now being the 3rd largest player after
Petronas (1000+) and Shell (900+). That 600 stations over time, however
may bring in very significant return to San Miguel group as one must
note that Malaysian oil consumption is about 600,000 barrels a day while
in Philippines it is below 300,000 (if I am not wrong).
With that backdrop, more importantly to us investors, Petron is willing
to invest in a competitive ground with the backdrop having players like
Petronas and Shell. It is growing at a pace of 30 - 50 stations a year
now while the likes of Shell is growing in teens. Caltex (400+ stations)
and BHP are even further behind, if I am not wrong.
Although the petrol retailing business is growing at just an average 3 -
5% yearly, Petron is probably the ones that has the highest growth.
Fighting against negative perceptions in the first few years of its
operations, it is now growing faster than Shell and Petronas (which I
will show in my future article). This is probably as I believe, the
other guys have a larger giant to slay. Shell, Caltex have much bigger
agenda to worry about than Malaysia's petrol station business while
Petronas will continue to worry over the low oil price environment and
its revenue contribution to the government. BHP? Well nothing much to
say. Maybe not so competent.
Further from the very nice cashflow which I shown above, Petron is now
trading at just below RM2 billion (RM7.25) market capitalisation.
Against the significantly bigger giant of about 2.6x revenue larger,
Petronas Dagangan - it is really cheap as PDB is now trading at RM24
billion market capitalisation. Translating into PE over last 12 months,
it is even a nicer story. Nevertheless, I am also careful over the
fluctuation in the oil price which will have some impact to the
bottomline numbers - hence I am not reading too much into the profit
numbers over the last 2 - 3 quarters. I believe the rise and drop in
oil price has some impact as it has certainly has some inventories to
hold. When oil price drops, the inventory value will drop, vice versa.
Over time, however this should not be an important benchmark - as we
cannot do a projection over the price of oil into the future. The more
important benchmark is whether their refinery is creating a healthy
margin and secondly - is it able to sell through its petrol pumps as
most of the oil that it refines - goes to the pump - if not mistaken.
THAT, over the last 2 years have shown mark improvement for Petron - and
it is a very important denominator for this business.
I know, I am a bit late in the game - as Petron climbed from around RM5 -
RM6 last year - at its current valuation and if it is manages to
continue its growth momentum, this is not expensive at all. In fact, it
is cheap.
(Over next articles, I may want to discuss the impact of technology -
electric cars etc. and introduce more financial numbers towards this
business. Obviously, I do not have all the answers.)
