INITIATION COVERAGE
Target Price (12M): RON 0.52
Current Price (August 2008): RON 0.4500
Recommendation: BUY
Overview
- PETROM is the largest integrated oil and gas producer in south-eastern Europe with OMV being the major shareholder (51%). It is the sole Romanian producer of crude oil, while its natural gas output accounts for 50% of the domestic output. PETROM’s two refineries carry a complexity factor of 8.3 and 8.8 respectively with production continuously skewed towards diesel as the company started envisaging the higher margins that can be captured from a higher diesel exposure. It’s refining capacity accounts for 35% of Romania’s total refining capacity.
- The company benefits from a high crude price environment, as its crude oil production is sold at a price close to the Ural price, although its production costs bear high industry cost inflation. E&P EBIT contributes more than 100% to the group’s EBIT, assuming reported losses in refining & marketing division, while gas contributes around 6% to the total EBIT. Upstream activity is expected to deliver a FY08 EBITDA of RON 4,729 Mn, up 33% YOY, given the introduction of new 3D modern technologies that will provide a further stabilisation of production combined with the boost of the crude oil price experienced lately and favourable FX rate environment. Moreover, this could be a reference year for PETROM as so far it did not benefit from such increased profitability levels and favourable earnings outlook ahead.
- The downstream segment is loss making as the two refineries have low energy efficiency. PETROM, as most European refineries struggled with low refining margins below mid-cycle. PETROM reported a benchmark refining margin of 3.56 USD/bbl at the end of 2007, very low to support its profitability. Currently refining margins are experiencing volatile evolution, with small hikes, due to the turmoil of the crude oil price supported by the supply - demand gap, while they seem similar on average YOY in H108. The downstream segment is expected to deliver a positive EBIT of around RON 194 Mn from 2012 onwards, after the completion of the ongoing upgrading program, as it is considered to add further refining capacity and as a result of higher expected refining margins in line with its European peers.
- Marketing segment. Due to the successfully completion of the Full Agency System at the end of 2007, PETROM managed to considerably improve its throughput per station and further increase its market share on the fuel distribution market. PETROM currently holds a 32% market share on the fuel distribution market, up 400bps from 2006. In the same time, PETROM further strengthened its retail presence in the neighbouring countries as currently it holds a market share of 31% in the Republic of Moldova, 18% in Bulgaria and 13% in Serbia.
- Expansion into the conventional energy sector through the construction of its own 860 MW gas-fired plant at Petrobrazi supplying Petrom’s refineries by 20% of its capacity. The plant has been scheduled to be operational by the end of 2011. The company also intends to expand in the renewable energy sources field (biogas) with lack of details yet.
- Net income is expected to boost 68% YOY to RON 2,980.9 Mn, enough to support a payout ratio of 44% and an estimated DPS of RON 0.023, up 21.05% YOY. Our EBITDA stands 19.42% above the FY08 guidance while the net profit forecast is 23% above FY08 guidance.
- We value PETROM through a SOTP valuation combining a DCF (weight 30%), a DDM (weight 20%) exercise, and a dividend yield target (weight 50%) on FY08- 09E DPS. We exercise a dividend yield target of 4%, 50bps higher than the 3-year historic average, on our FY08-09E average DPS. All in all, we derive a fair value of RON 0.52/share, implying an upside of 16%. On top, we also exercise a fair value for the new gas-fired plant incorporating a conservative scenario given the construction and feasibility risk, and lack of economics yet, of the project. We derive a fair value for the power plant of RON 3.4 Bn or RON 0.06/share, which we do not yet incorporate in our current valuation as well as any assumptions for expansion in Renewable Energy Sources. We initiate our coverage with a BUY rating, while we see PETROM as an outperformer given the favourable crude oil environment, FX impact, strong positioning and quite clear investment plan and despite the heavy capex in the next two years. On the negative side, the stock maintains a very low free-float at 6.5%.
BET rebased/ SNP rebased (chart)
| Listed | BSE/ |
| Ticker | SNP |
| Code Reuters | SNPP.BX |
| Code Bloomberg | SNP RO |
| Code ISIN | ROSNPPACNOR9 |
| Price 20 August 2008 (RON) | 0.4500 |
| No. of shares issued | 56,644,108,335 |
| Mk cap 20 August 2008 (RON) | 25,489,848,750 |
| Minimum price YOY | 0.3670 |
| Maximum price YOY | 0.5600 |
| Free float | 6.5% |
| Change % (1M) | 8.17% |
| Change YTD | -9.46% |
| Change YOY | -9.09% |
| Average volume (last month) | 2,917,283 |
| Source: Bucharest Stock exchange. |
| Key Ratios | 2007 | 2008F | 2009F | 2010F |
| sales | 12,485 | 16,889 | 18,707 | 18,231 |
| EBITDA | 2,825 | 4,502 | 5,090 | 5,154 |
| EBITDA mgn (%) | 22.63 | 26.65 | 27.20 | 28.29 |
| EV/EBITDA (x) | 10.26 | 5.86 | 5.41 | 5.30 |
| EV/sales (x) | 2.32 | 1.56 | 1.47 | 1.49 |
| P/EV (x) | 1.03 | 1.01 | 0.97 | 0.97 |
| P/S (x) | 2.10 | 1.51 | 1.36 | 1.40 |
| P/E (x) | 14.40 | 8.55 | 8.06 | 8.48 |
| P/BV (x) | 1.90 | 1.69 | 1.50 | 1.37 |
| EPS | 0.03 | 0.05 | 0.06 | 0.05 |
| DPS | 0.02 | 0.02 | 0.02 | 0.02 |
| P/CF (x) | 9.70 | 6.09 | 5.44 | 5.41 |
| Dividend yield (%) | 4.20 | 5.10 | 5.40 | 5.10 |
Source: Petrom, SSIF IEBATrust SA estimates.
TABLE OF CONTENTS
I INVESTMENT SUMMARY
II VALUATION
1A. SOTP valuation exercise
1A1. Valuation through the DCF method
1A2. Valuation through the DDM model
1A3. Dividend yield approach
1B. Valuation exercise on the new gas fired plant
2. Peer Group analysis
3. Petrom and Catalysts
III SWOT analysis
IV MACROECONOMIC ENVIRONMENT
4. Macroeconomic Environment Overview
5. Trends on the international oil markets
6. Romania’s energy market
7. Petrom’s activities. Key factors and targets
V COMPANY’S OVERVIEW
8. Brief profile
9. Shareholders’ Structure
10. Financials’ Overview and Forecasts
11. H1’08 results
12. Dividend Policy
VI RECOMMENDATION SYSTEM
VII ABREVIATIONS
VIII DISCLAIMER
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To view the original document, please click on the link below:
http://reports.aiidatapro.com/BOB/IebaTrust/Petrom_Aug_20_2008.pdf
*****
Copyright: 2006 SSIF IEBA TRUST SA. All rights reserved.
For further Information please contact IEBA TRUST, 66-68 Buzesti Str. , Fl. 8, Sector 1, Bucharest, Romania
Tel. +40 21 313 0102, fax: +40 21 313 1595, e-mail: research@iebatrust.ro, web site: http://www.iebatrust.ro
*****
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Petrom Aug 20 2008.pdf, 1,365 Kb
