PETRON MALAYSIA REFINING & MARKETING BHD

By RHB Research Institute Rating: Buy Target price: RM16.20

RHB Research Institute has initiated coverage on Petron with a buy recommendation, pointing out that the company is the third largest retail station operator in Malaysia.

“It owns over 580 service stations nationwide, distributing gasoline, diesel and liquefied petroleum gas (LPG) products. Besides retail marketing, the company also owns an 88,000 barrels per day refinery located in Port Dickson, Malaysia with a Nelson Complexity Index of 3.

“The refinery is capable of producing gasoline, diesel, LPG, kerosene and low sulphur waxy residue (LWSR). The refinery has an average utilisation rate of 50% due to the unfavourable economics of LSWR which, in turn is due to its low complexity rate.”

Petron is 73.4%-owned by Petron Corp, the largest oil refining and marketing company in the Philippines.

“Its retail fuel segment plays a volume game, ie more retail stations imply higher volume. As such, we expect its retail volume to grow by 4% each year, driven by the opening of new stations.

“Our base case scenario assumes Petron would open 15 new stations every year. Its commercial fuel segment’s earnings are driven by spreads for naphtha, kerosene and LSWR.”

As of the first half of 2017, Petron is a net cash company, said the research house.

“We expect Petron to end 2017 in a net cash position. Total borrowings are at RM66.4mil, while its cash position is at RM156mil. This compares with end-2016’s net debt position of RM136mil.

“Net cash from operations and free cash flows have been on an increasing trend, on better cost management and the automatic pricing mechanism, which transmits changes in oil prices to retail fuel prices.”