Monday, September 3, 2018

Before providing Government with fuel cards, Petron was already attractive. Now?

Last year, I gave my opinion on Petron over Hengyuan as well as the potential for the stock from a defensive investment perspective or even if we are to look at mid-growth stock. When I was about to collect the stock, there was a craze over an almost similar stock - Hengyuan. Hengyuan had a run until a huge (enough) stock investment community became well-verse about crack spread even though we have never visited any kind of refinery before.

As in all spikes up or down, it will always come to normalcy, this is what happens to a refining business - and it was pretty shortlived. This is also the usual trend of any economic concern especially for the more traditional business. Petrol is now a traditional business with a threat towards its existence - electric vehicle - but not in the next short decade.

In a normal situation, a B2C business is more often a better bet and provide better stability. Petron and Petronas Dagangan (PDB) are the only 2 traded stocks that has that exposure for investors in Malaysian stocks. PDB is trading at around 23x PE while Petron is trading at less than 7x PE.

What causes the difference in valuation? My theory for that is the wealth of our government controlled funds - Khazanah, EPF, KWAP, PNB and few more. They have less options to invest with the continuing strength in their deposit taking. PDB moreover is a Composite stock whereas Petron is not hence making it more reason for government related funds to buy more.

As a value investor, these are what I try to take opportunity of. To me Petron has built its business to be just as good as PDB albeit the size. In fact, I like it more as a private company as opposed to PDB being a government owned business.

The approval for Petron to be a provider to government fuel provider for its fleet of vehicles has also probably allow us to see the change in attitudes towards private businesses as we have been exposed to preference for GLICs and GLCs in the past decades.

As it is Petron has been growing at around 5% to 7% over the last few years, above its peers and from this new business opportunity, I see a spike in its business in the short term.

Last quarter (April to June 2018), we see Petron making around RM92 million net profits and I see this is a number where it is pretty much an average for the company with continuous growth of around 7% to 8%. This is a period where fuel price was fixed at RM2.20 (RON95) for most period of the quarter. This action taken by the new government will also allow petrol station operators to lose less than when they allowed it to float. This is positive for company such as Petron.

Crack margins was also weak for the period in review, hence the allowance for upside is also there.

At its normalcy, Petron should have been a strong defensive stock but in its price as I reiterated, has not shown anything of that. Hopefully yet!

Sunday, September 2, 2018

How should we see Ekovest?

The change in government is going to see changes in Ekovest from a company perspective which is from largely construction based (from government related contracts) to more of its dependence on its long term assets - toll and land. I know many would be concerned on the toll assets as the new government is looking at ways to eliminate toll but lets face it, this is going to be difficult as the country juggles with our finances and continuous development. Toll over the period like it or not it is still an asset which is generating very good cashflow.

For the next 3 years the consistent revenue that is to be generated is going to come are mainly from construction (SPE highway) and toll (DUKE 1 and 2).

Property business as one know is going to be sporadic until it manages to obtain consistent revenue from its property investment - which potentially will come from EkoCheras mall.

The below is a pick from its latest 4Q18 quarter results, and as we see there is new revenue from DUKE 2 (which increases the contribution from toll) since December 2017. However, in accounting for concession assets, this is also the start where it is starting to recognise the interest expense from the toll assets (see Figure 2).
Figure 1
Hence, profitability from toll concession will not be good, but that is a different story when concerning cashflow. Its cashflow will be good and when the third highway is completed - i.e. the SPE it is all full throttle for the company. Again, I am not worried when it comes to abolition of tolls, it is very hard for the government to do that. Otherwise, they would have contacted the concessionaires and discuss. So far, the only concession that they have contacted is their own - PLUS which is owned Khazanah and EPF. The way I see it is that the current government is trying to avoid the topic until when they are ready to discuss about this.

Figure 2
The concern over the losses for 4Q18. As mentioned in Figure 3 below, part of the losses is due to costs of the failed acquisition of IWCITY - turns out to be a blessing in disguise and its provisioning for LAD - Ekocheras and highwe interest expense as mentioned earlier.
Figure 3

How I see Ekovest

As in many of my investments, I see Ekovest as a good long term investment with solid assets. It is moving into a territory where it will be less dependent on new projects while focusing on what they have built in the last one decade.

Seems to me, after this few years, it hopefully can become a good dividend stock if the controlling shareholder is fair.