Petgas- running out of steam!

Results Update

Petgas's net profit dropped 33.5% q-o-q to RM267 million on the back of an unchanged turnover of RM891 million. When compared to the same quarter last year, net profit increased by 32% while turnover was up 11%.

The company attributed the drop in its bottom-line on q-o-q basis to "higher cost of revenue". For QE31/12/2010, the improved bottom-line was due to "higher revenue and lower cost of revenue". Petgas is too stingy in its communication to its investors. This failure reflects poorly on the management of Petgas.


Table 1: Petgas's last 8 quarterly results



Chart 1: Petgas's last 19 quarterly results



Chart 2: Petgas's profit margin over the last 19 quarters

Valuation

It is very tricky to determine the EPS to use for computing the PE of Petgas. That's because we do not know whether the drop in the bottom-line for Petgas is a one-off event or whether it could recur. If we assumed that it is one-off, we can use the last 4 quarters' EPS to arrive at the PE of 15 times. On the other hand, if this is the new level of profit for Petgas, then the future EPS would be 54 sen & the PE would be 21 times.

Petgas closed at RM11.22 yesterday.

Increased Demand from Japan

Petgas may benefit from increased demand for LPG from Japan as a result of the shutdown of some of Japan's nuclear reactor. How Petgas can meet this increased demand is a big question mark. According to a report in the Malaysian Insiders: "Malaysia is already Japan’s biggest LNG supplier, shipping it 14 million tonnes last year. Japan, the world’s top LNG buyer, may import about an extra one billion cubic feet per day to make up for nine gigawatts of nuclear power that have been lost, although traders say it is too early to tell how much more LNG would be needed." For more, go here.

Technical Outlook

Based on the weekly chart, Petgas tested the upper boundary of an upward channel & it is likely to slowly drift lower (towards the uptrend line). From the monthly chart, Petgas's upside is limited as it is trading very near to its all-time high of RM12.00 (ignoring the spike of March 9, 2010 which hit a high of RM13.29).


Chart 3: Petgas's weekly chart as at May 11, 2011 (Source: Quickcharts)



Chart 4: Petgas's monthly chart as at May 11, 2011 (Source: Tradesignum)

Conclusion

Based on the poor & unexplained financial performance & the limited technical upside, I think it is time to take some profit on Petgas. However, the promise of more business flowing from Japan may keep the share price buoyant for a while & if this additional business can boost the bottom-line, we may see a recovery in the share price.