Author: sumato88 | Publish date: Thu, 24 Aug 2017, 08:46 PM
I have been very quiet of late as I try not to join the "experts" to comment on daily share price movement.
After a long wait, Petronm has finally reported its 2Q17 results. On first glance, it is indeed very commendable with reported profit +48% yoy to RM91m, bringing its 1H17 profit to RM200m (+156% yoy). However, when one delve into it, it is not hard to realize there is an one of disposal gain of RM40m. That's the only non core item I will consider for Petronm as I view realized/unrealized/derivative gain or loss as part and parcel of the refinery biz due to the group hedging policy.
So back to the core profit for 2Q17, why was it only RM51m, vs RM109m in 1Q17 and RM62m in 2Q16? This is even confusing as management mentioned crack spread was better in 2Q17 and volume (this refer to the marketing volume) +9% yoy. Was it because of huge inventory loss? I doubt so, seriously. It's hard for me to explain but based on my calculations, inventory loss is not as significant, most probably less than RM10m after 50% hedging. Bear in mind, the company only holds 3 weeks of inventory on a rolling basis everyday. Hence, the company will gain in some days but loss in some days as crude oil go into refinery today was bought 3 weeks ago, while crack spread (refined product price today - crude price today) is based on today pricing.
Then why would Petronm report weaker profit in 2Q17? The culprit was the 25 days shut down in the quarter for plant maintenance, which wasn't mentioned in the quarterly results but it was disclosed in Petron Corp's 2Q17 results. Plant shut down is always the biggest hit to profitability as (1) the company loss in production while fixed cost carry on, & (2) one off maintenance cost which will be recognized during the quarter. It is very hard for us to calculate the cost for these 2 items but one can draw a comparison from its 4Q15 results which closed down its refinery for 40 days and reported only RM17m profit. Obviously, this profit is too small and not reflective of Petronm's core profit as the petrol kiosk profit is definitely higher than this amount based on its sales volume.
So to me, 2Q17 wasn't great but a decent quarter, especially the company's operating cash flow remain strong and has turned net cash in this quarter (RM90m). This is a different animal as compared to Hengyuan, which has huge debt and has no stable and profitable retail biz. So pls don't make stupid comparison without differentiating the 2, just like I never expect Petronm to trade up to PetDag's 25x PE.
What's next? Many of you may be thinking at what price q to sell tomorrow morning to cut the position but I suggest you to think twice before you key in the trade. I have no idea if the price will go up or down tomorrow but I am pretty confident that Petronm is in a good position (net cash means no more interest expenses) to report record earnings in 2017 (I still stick with my expectations of RM350-400m core profit) as crack spread has expanded in July and Aug 2017. This coupled with the refinery biz revert to normal production in 3Q17, I think the company can comfortably report profit above RM100m per quarter.
Along the investment journey, sometime we just have to ignore the temporary hiccup and market noises for us grow and become a better investor.
A good example is Ann Joo which has reported 69% earnings plunged in 2Q17 on Tuesday but share price went up 5-6% the next day as market look ahead the temporary setback and eagerly look into 2H17 as steel price has been trending up since July 2017. Don't you think this sounds like dejavu?