This article first appeared in The Edge Financial Daily on November 21, 2017

Petron Malaysia Refining & Marketing Bhd
(Nov 20, RM11.92)
Initiate coverage with an outperform call and target price (TP) of RM14.46: Petron Malaysia Refining & Marketing Bhd made its foray into Malaysia in 1933, marking over 80 years of business continuity in this nation. Its roots can be traced back to ExxonMobil, when the company set up Standard Vacuum Oil Company. Today, it is the third largest petrol retail operator.

We begin coverage of Petron with an “outperform” call and TP of RM14.46. We arrive at our TP using a discounted cash flow method, applying a weighted average cost of capital of 7.71%.

At our TP, Petron’s price-earnings ratio (PER) equivalent is 7.5 times, lower than the regional average of 11.4 times, but justified given its smaller market capitalisation. Although above its long-term average, Petron’s forward PER is supported by the changing prospects for oil prices.

The Opec and non-Opec oil production cut agreement, which is likely to be extended for a second round in the first half of 2018, will drive sentiment on listed oil-based companies, Petron included.

Investor interest in Petron will also be moved by several factors, including its attractive business model which shields the company from adverse oil price movements and ringgit fluctuations.

Oil prices are expected to record steady gains in the future, driven by an improving supply and demand mix, with the current imbalance expected to be corrected in the next few years, and the impact of slow or stalled capacity expansion since 2014, which will put pressure on future prices.

The adjusted beta of 0.7 times to 0.85 times against Brent and Tapis oil prices suggests a strong probability of Petron’s share price rallying in tandem with oil prices.

Investor interest will also be driven by the solid captive market for Petron’s throughput in Malaysia, not to mention its underutilised capacity, which can be unleashed should the need arise.

Malaysia’s position as a country with the world’s third highest car penetration rate will also endear to investors as demand for oil will continue unfettered even with booming global oil prices.

Above all, Petron has a backing from its parent company, San Miguel Corp and related company, Petron Corp, not only for cross-selling, but also for technical expertise and financial support, particularly in a capital-intensive and long gestation sector like oil. — PublicInvest Research, Nov 20