Is Petron Malaysia a value trap? (Part 1 of 2)
Petron Malaysia Refining and Marketing Berhad (Petron Malaysia) is a downstream oil and gas company.
With its current price of RM 3.26 (1 Oct 2020) compared to its NTA of RM 5.93 (as of 30 June 2020), you may wonder why is the market giving you such a bargain.
No doubt the oil and gas industry is going through a challenging period due to the Covid-19 pandemic as well as the global excess supply.
Is the share price at such a level because the company has poor prospects? Are its assets going to be impaired?
If these answers are yes, then it is a value trap. But if it is not, then it is a bargain
Join me in a 2-parts series as I present my rationale for why Petron Malaysia is not a value trap.
I will show that it still has a good future and that its assets are not going to be impaired. Its intrinsic value is still intact.
Part 1 will be presented here while Part 2 was published on 25 Oct 2020. There is now an update that was published on 10 Oct 2021.
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Contents
- What is so unique about Petron Malaysia?
- Has it used its Funds in the Best Way?
- Can you describe the Current Performance as Outstanding?
- Is there a Rich and Unique History?
- Is there a Great Future?
- Pulling it all together
Valuation
Date |
1
Oct 2020 |
Company
Name |
Petron
Malaysia Refining and Marketing Berhad |
Stock
Name in Bursa Malaysia |
PETRONM |
Company’s
Bursa Co |
3042 |
Bursa
Malaysia Sector |
Energy |
Listing
Date on Bursa Malaysia |
1963 |
Financial
Year End |
Dec |
Latest
Quarterly Results |
2nd
Quarter 2020, 30 June 2020 |
Shareholders’
Equity |
RM
1,601 million (30 June 2020) |
Market
Capitalization |
RM
880 million (1 Oct 2020) |
Corporate
Website |
Table 1: Company Info
What is so unique about Petron Malaysia?
- Petron Fuel International Sdn. Bhd. that offers retail and commercial fuels and serves customers worldwide.
- Petron Oil (M) Sdn. Bhd. The Company's business includes the wholesale distribution of petroleum and petroleum products.
- Petron Malaysia that is listed on Bursa Malaysia
- It opened its first service station in Malaysia in 1921
- Construction of the Port Dickson refinery was started in 1961 and commenced operations in 1963.
- The Petron Port Dickson Refinery (PDR) has a rated capacity of 88,000 barrels per day. It produces a wide range of petroleum products eg gasoline, diesel, liquefied petroleum gas (LPG), and aviation fuel.
- Eleven strategically-located depots and terminals
- 700 service stations throughout Malaysia.
- Transportation - served by the service stations network
- Households with its LPG
- Commercial with its industrial fuel products
Case Notes Before 2012, Petron Malaysia (then known as Esso Malaysian Berhad) was part of the ExxonMobil Group. In 2012, the San Miguel Corporation of Philippines acquired all ExxonMobil Group’s interests in Esso Malaysia Berhad
Because of the changes, I have analyzed the historical performance of Petron Malaysia from 2012 onwards. Some of Petron Malaysia’s products are marketed through its sister companies in Malaysia and while the Management Discussion and Analysis in the Annual Reports do not always make the distinction between what is sold by the listed entity and those by the sister companies, the financial statements of Petron Malaysia reflect the financials of the listed entity. Where appropriate, in the descriptive part of my case study, I have pointed out those contributed by the sister companies. This case study illustrates the importance of being clear about which entity you are analyzing and valuing and not to lose sight of this when you undertake your research. This is especially critical when you analyze a company that is part of a bigger group. Sometimes in such cases, companies do not provide a clear distinction between whether the item discussed covered the whole group or only the particular part of the company. I am of course assuming that you are interested to learn how to analyze and value companies. What would you do if you are not interested in doing your own analysis and valuation but still want to be a value investor? One way is to rely on other experts to assess and value companies for you. Those who do this well include people like Seeking Alpha.* Click the link for some free stock advice. If you subscribe to their services, you can then just read their analysis and assessment. |
Has it used its Funds in the Best Way?
Items |
Ref |
RM million |
Shareholders’
Equity |
SHF |
1,601 |
Minority
Interests |
MI |
0 |
Total
Debt/Lease |
Debt |
544 |
TCE |
|
2,145 |
Items |
Ref |
RM million |
Net
Operating Assets |
Net OA |
1,883 |
Net
Financial Assets |
Net FA |
262 |
Non-Operating
Assets |
Non OA |
0 |
Total |
|
2,145 |
Table
2: Sources and Uses of Funds (2nd Quarter, 30 June
2020) |
Chart 1: Petron Malaysia Sources and Uses of Funds |
Can you describe the Current Performance as Outstanding?
- The drop in demand due to the Movement Control Order (MCO) that was put in place to control the transmission of Covid-19
- The plunge in global oil price and the sluggish domestic demand due to the MCO leading to an inventory holding loss of RM 68 million.
Chart 2: Petron Malaysia Performance Index |
- The revenue in 2019 is about the same as that in 2012 and over the past 8 years, the revenue was below that 2012 level most of the time
- During the past 8 years, the annual profits were above the 2012 level for 5 years. Petron Malaysia sustained losses in 2013 and 2014.
- There was no discernible gross profitability trend. This is actually a good sign as the gross profit as a % of the total assets has remained steady. This is in spite of the variation in profits and the decline in the price of crude oil since 2012.
- From 2012 to 2014 the average ROE was (2) %, but for the past 3 years, it averaged 17 %.
Chart 3: Petron Malaysia Past 3 years Performance |
Is there a Rich and Unique History?
- The refining of petroleum products in its PDR
- The marketing of these products through Petron’s fuel retail network and commercial businesses.
- Before 2012, refinery operations were reported first. This was followed by the reports on the retailing and commercial businesses.
- From 2012, the marketing and sales of petroleum products were reported first. At the same time, there were more discussions on these compared to the refinery operations.
- Domestic sales became a larger part of the total revenue
- Sales to related party became a smaller part of the total revenue
Chart 4: Petron Malaysia Revenue Source |
- The number of Petron service stations has grown from about 550 (former Esso and Mobil stations) in 2012 to 700 in 2019. Not all these are fully owned by Petron Malaysia. Some were owned by Petron Fuel International and some by Petron Oil (M).
- The main point is that today there are about 25 % more service stations retailing the Petron brand of gasoline compared to 2012. Yet this is not reflected in Petron Malaysia's revenue.
- In 2013, Petron Malaysia acquired the LPG business from its sister company Petrol Fuel International Sdn Bhd. The goal was to consolidate and grow the business in Peninsular Malaysia. By 2014 it had 1.6 million Gasul branded cylinders in the market. Today Petron Malaysia supplies LPG to households and restaurants. It was the first to introduce the selling of gas cylinders in service stations.
- The Treats stores at major Petron service stations were introduced in 2012 and there were 200 stores by the end of 2013. By 2018, there were 470 Treats convenience stores and P Kedai marts. Of these, 240 were owned by Petron Malaysia.
- The number of loyalty cardholders (formerly ExxonMoble Smile cardholders) increased from 1.3 million in 2013 to 2 million by 2014. By 2018, there were 3 million members.
- The Petron Fleet card was introduced in 2013 and served 4000 corporate customers in 2014. In 2016, 3000 new cards were added to the base.
Chart 5: Petron Malaysia Revenue Profile |
- In 2012, Brent crude was trading at about USD 104 per barrel whereas in 2019 it was trading at USD 62, a decline of 40%.
- Petron Malaysia's product prices would have declined correspondingly.
- While there is no equivalent overall index for Petron Malaysia product price, I deduced that it must have declined by 24 % for the RM revenue to be “constant”.
Chart 6: Petron Malaysia RM Sales vs No of barrels of oil Sales |
If you attribute the lack of growth in the RM sales to the decline in the global oil price, then when the global oil price rises, we should have the RM sales growth.
Is there a Great Future?

- Secular growth in demand
- Taking market share from its competitors
- The shift from the refinery to sales and marketing is correct given that there will be excess refining capacity in the country in the coming years
- We are unlikely to see double digits revenue growth given that the growth in the underlying demand is in the low single digits. Furthermore, part of the growth would be at the expense of its competitors
- Future revenue and profit growth will be dependent on an increase in crude oil prices.
- Petron Malaysia has spent considerable efforts to improve its distribution and logistics facilities and this will have long-term benefits.
Oil consumption
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Chart 7: Malaysia Oil Consumption Source: Statista |
- About half is petrol
- Diesel accounted for 1/3
- LPG accounted for about 7%
![]() |
Chart 8: Malaysian Petroleum Products Consumption Source: Malaysia Energy Commission Jun 2019 |
Gasoline
![]() |
Chart 9: Malaysia Gasoline Consumption Source: The Global Economy.com |
Automatic Pricing Mechanism (APM)
- MOPS = Mean of Singapore’s Platt oil prices. The formula meant that the refinery costs are already included and indexed in the MOPS.
- The operations cost, profit margin, and Alpha are intended to cover the sales, marketing, and distribution portion.
- In the weeks leading up to the 2018 Malaysian election, the retail prices were frozen.
- In 2019, the new government decided to bring back the APM while at the same time revising upwards the dealers’ margins. According to the then Finance Ministry, there will also be a cap.
- In Feb 2020, the cap on the retail fuel prices for RON95 and diesel was revised downwards based on the APM.
Pulling it all together
- It appears to be cheap looking mainly from the historical multiple perspectives
- But is actually cheap because of insurmountable underlying problems.
- Its business in terms of sales of barrels of oil has been growing.
- It has been able to maintain its margins and controlled its SGA expenses while growing
Reading guideIf you are a first-time visitor to this blog, you may not be familiar with some of the concepts that I have used in my analysis and valuation. I suggest that you check up the Foundations series - Fundamentals 01, Fundamentals 02, and Fundamentals 03. I also have a Definitions page in case you are not familiar with the terms I have used.
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Disclaimer & DisclosureI am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them.
The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such.
I may have equity interests in some of the companies featured.
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