SPC, ml maintain BUY with target price $10
-3Q weakness explained. The third quarter is traditionally the weakest
for
refineries in view of high global operating rate following maintenance
shutdowns in 2Q. This year, the weakness is likely to be compounded by
the
Olympic Games as well as the US economic slowdown which muted the
summer
driving season effect. In addition, if oil price continues to decline,
refiners will be hit by crude oil inventory loss.
-But SPC ¡°may?post substantial derivatives gain in 3Q. SPC made an
investment loss of S$48mn on financial derivatives in 2Q08 when it
hedged
its crude intake with future derivatives. The loss muted the impact of
inventory gain for the quarter. In our view, if crude oil price were to
average below the 2Q level, refiners would be exposed to inventory
loss.
For SPC, any inventory gain (or loss) would be cushioned by the crude
future hedging.
-Several catalysts suggest margins should rebound soon. (1) Pent-up
demand
in China, which has been building before and during the Olympics, is
likely
to cause a positive shockwave to the GRMs after the games. (2) In
Europe,
an estimated 500,000bpd of supply is likely to go offline in 4Q08 to
prepare for the introduction of Euro V fuel specs from 1 January 2009.
(3)
In Asia, the scheduled refinery shutdown between September and November
will reduce existing capacities by 540,000bpd, softening the impact of
the
Reliance start-up.
-One of the cheapest in the sector. SPC is trading at 2008E P/E of
5.4x,
which represents a 28% discount to regional peers. We believe this
steep
discount is unjustified. After all, crude oil price, despite its fall
from
a historical peak of around US$140/bbl, is still substantially above
the
level when SPC acquired its upstream assets. Moreover, comparing the
dividend yield to P/E valuation, SPC is now one of the cheapest in the
sector.