April 1, 2014 – 30% Returns still exist in PSEI 6500- Know where to look for it.

Updated as of May 31, 2014 –

There’s been several news that came out that PCOR refinery plant which was scheduled to open 4Q14 will be delayed by 3 months or 1Q15 — which explains the sluggish price action.  Nevertheless, the core thesis of the fundamentalists never really changed.  NPV of the entire refinery plant will only be adjusted by 3 months which hardly makes any dent in the fundamental value.  For any investor, it’s just another 3 months worth of holding.  I too don’t know how long PCOR will rise but when you look at the MACD,RSI indicators, it really shows only a slow accumulation.  Worst case scenario , we get a retest at 11.50 (the placement price) but I peg this likelihood to around 20% chance only.

The good news is that Petron has gotten a lot of awarded contracts (AFP has already gave them a P4 Bil contract.)

http://www.doe.gov.ph/energist/index.php/80-categorised/downstream-oil-industry/4775-petron-wins-p4-b-afp-fuel-supply-deal

The fact that Petron can pay P600M pesos in its union of workers show that this refinery is a positive cash flow business in the long run so no worries.

http://www.interaksyon.com/business/87056/petron-bataan-refinery-and-union-sign-new-p600-m-cba—dole

It pleases me to tell any Petron investor that the engineering partner is world class to ensure that this upgrade in our refinery plant will happen.

http://www.engineeringnews.co.za/article/petron-refinery-master-plan-phase-2-upgrade-the-philippines-2012-02-24

To make yourself updated with any news specific to any company you are holding – please check my friend’s great website.  Mr. Jun Tags and David Miranda have created robots that help us curate and automate all the news links to make our investing and trading lives easier.  All the best faceless traders 😛

http://bookaka.com/Home/Company/PCOR

 

*****

Highly Liquid Growth Stock Trading Less than 10X Forward PE (This Exists But Look Beyond the Short Term) 

#1 on this list is Petron Corporation ($PCOR)

Petron is a growth stock trading at no growth forward P/Es. At Php11.50-11.90 (any price below Php12.00) – you have a risk of only P1.00, but a reward of as much as P6.00 (for longer term people who can hold for at least a year.)

Which company in the PSEI can offer an earnings CAGR of more than 50% in the next 2 years?  Which company trades less than 10X Forward? Only Petron.

Why will Petron earn 50% income growth going forward?

Short Answer: Petron’s US$2bn refinery upgrade in Philippines is already 90% complete and should begin commercial operations in Q414.

Longer Answer:

Found via – http://businessmirror.com.ph/index.php/en/business/companies/17919-petron-set-to-complete-refinery-upgrade-in-2014

The project, aims to upgrade the oil firm’s 180,000-barrel-per-day refinery situated in Limay, Bataan.

The refinery upgrade will make Petron the only oil company capable of locally producing fuels that meet the more stringent and environment-friendly Euro-4 standard. The company said this will substantially improve margins as it eliminates the production of low-value fuel oil, converting it to high-value gasoline, diesel and petrochemicals instead.  Moreover, it will also give Petron the flexibility to refine crude from a variety of sources, thus enhancing the country’s supply security.  

When completed in 2014, Petron’s refinery will be able to produce petroleum coke, which may be used as fuel for the new cogeneration power plant for the refinery, the country’s largest oil refiner said in a presentation to its investors. Petroleum coke (often abbreviated as Pet coke or petcoke) is a carbonaceous solid derived from oil refinery cooker units or other cracking processes. 

The oil firm also reported that phase 2 of its cogeneration power plant is 80-percent complete. Phase 1 started operations in May 2013.

The new cogeneration power plant, which is expected to cost P21 billion, will initially use coal for its fuel requirements and then switch to Pet coke once  the  Limay refinery starts production in 2014.

 bataan refinery

petron bataan refinery

Here’s the website: http://www.petron.com/web/

 Important Questions:

1.) What just happened?  Why did Petron fall to 11.50-11.90?

PCERP (Petron Retirement Fund) sold 470M shares at P11.50.  Petron’s largest single majority shareholder is $SMC.

Important for Traders and Investors

This is actually positive to us because PCOR’s free float will increase from 16.61% to 21.62% post the sale.  This will effectively increase PCOR’s weight and may even be reasons for a possible entry in future FTSE,MSCI or PSEI rebalancing.  Note the Free Float is an important criteria. (Note that Meralco got included in PSEI primarily after the huge stake sale of $SMC.) 

2.) Will there be further placements?  You mentioned $2 Billion dollars worth of capital expenditures?

According to PCOR’s December 2013 public ownership report, the retirement fund owns 1,386,156,097 shares. Post the sale, the fund still has 916,156,097 shares. It is possible that the pension fund will sell the rest of its stake to raise an additional P10.5 billion (assuming a price of P11.50/share) given the huge capital outlay needed for the Malaysian refinery upgrade.   However,  as long as the market trades above P11.50 for $PCOR, it is highly likely that any further sales will be limited to this level.

2013 Public Ownership Report

2013 public ownership report

 

3.) Petron’s FY13 Earnings – What were the reasons for the jump in income? Is that sustainable?

By virtue of catalysts , it’s highly possible they can sustain and even grow due to so many catalyts.  So the market cap today of P110 Bil can grow to P150 Bil IF and only IF the earnings can grow to P10Bil in the next 2 years.  Is this possible? Via a change in margin and retail network expansion both Philippines and Malaysia – this is possible. a product mix change from negatives (fuel oil and asphalts) to whites (unleaded,diesel,gasoline,jet- better fuel like Euro 4 standards) – will make margin higher. Note too the various catalysts already pointed out. If service stations expand, then sales volume expands.  A rising GDP also means more fuel consumption.

 

Petron Corp. nearly tripled its net income in 2013 on the back of its sales performance in Malaysia.

In a statement, the country’s leading oil firm said it booked a consolidated net income in 2013 of P5.1 billion, nearly three times the P1.78-billion income posted in 2012 on “higher sales volumes for its Philippine and Malaysian operations.”

It maintained market leadership with an overall share in the Philippines of nearly 37 percent, driven mainly by its ongoing network expansion program.

Read more: http://business.inquirer.net/166842/petrons-consolidated-net-income-rose-nearly-300-in-2013-report#ixzz2xe0xcbjJ
Follow us: @inquirerdotnet on Twitter | inquirerdotnet on Facebook

catalysts

 

 

2013 fy income

petron corp stock data

4.) Earnings Growth Comes from Product Mix Change after RMP 2 Refinery

RMP2 Project is 95% complete according to FY13 results briefing.  By 4Q14, commercial operations starts where earnings will improve owing to

a.) 5 year tax holiday

b.) higher refining volumes

c.) higher proportion of white products

Current Gross Profit Margin of 10% rises to 12%

 

5.) FCF positive by 2015, able to pay debts too by then.

After the 3 year Refinery programme, the company is expected to be able to pay off maturing debts since the earnings from the refinery and expanded network has an internal rate of return of 19%, higher than the debt interest of their perpetual bonds which is a mere 7.5%.

http://business.inquirer.net/105265/petron-raises-500m-from-sale-of-perpetual-bonds

 

6.) Valuations –

Most Refineries trade 15X P/E without much growth in earnings.  Petron on the other hand is a growth story, as long as you can hold until 4Q14 commercial operations and especially by 2015 when those Euro4 and Refinery 2 from Bataan earnings start kicking in.

 

This is a waiting game.  This is not for trading.  This is just buy and hold.

****

Risks –

There can be another Petron Retirement Fund selling since there’s still 900M shares to sell, but I’m not sure if they’d sell lower than P11.50

 

– Faceless Trader

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3 Responses to April 1, 2014 – 30% Returns still exist in PSEI 6500- Know where to look for it.

  1. frank says:

    comprehensive study very impressive now market sentiment or perception is totally different galaxy.

    Like

    • problem is if Petron actually has another placement. Actually, my thought process is — whatever happens – looks like SMC can basically go up as long as it keeps on selling some of its prized assets. With the way SMC handles things though, I dont think they have any plans on selling petron since they’re very much into the refinery and infrastructure business nowadays. I think there’s a high probability SMC will sell more PF.(they’re planning to leave consumer rather than selling their stake out of petron.) But anyway, it’s hard to really guess.

      Like

  2. Pingback: Contrarian Investing: $PCOR | Technimentalist

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