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!

1 comment:

GL said...

Hi Felicity ... perhaps you may want to update your portfolio holdings as it is already way outdated ... :) thanks.