SPC Research Report

by DBS Group (April 23)

WHILE the group's operating profit was up 7 per cent y-o-y, operating profit from refining business actually dropped 24 per cent or S$25 million from a year ago. This was despite a stable refining margin of US$7 per barrel. Oil hedging loss, weak US dollar, and high freight rate contributed to the y-o-y decline in operating profit from refining business.

Management did not disclose details of its hedging activities but indicated that hedging cost was $10 million higher than in Q1 2007. Trading volume is expected to recover in Q2 2008 from a decline in Q1 2008 to 19.3 million barrels, versus 20.5 million barrels in Q1 2007. However, the scheduled maintenance in Q2 2008 would lower refinery crude throughput by 3 per cent from the Q1 2008 level.

SPC is still seeking to acquire operating E&P assets. However, management acknowledged that at current record-high oil prices it would be difficult to find any acquisition opportunity at good price. Therefore, SPC will likely focus more on E&P organic growth during the next two years.

It expects to drill 18-19 exploration wells in 2008 with allocated budget of US$50 million-US$60 million. Refining business will continue to dominate SPC's earnings in the coming years. We expect SPC's quarterly earnings to peak in Q2 2008, supported by seasonally strong refining margins and record crude prices.

We expect quarterly earnings to jump to S$160 million-S$180 million in Q2 2008, and soften to S$100 million-S$130 million in Q3-Q4 2008.

Based on our recently raised crude price assumptions, we forecasted FY08-09 net profits that are 1.8 per cent and 11 per cent higher respectively. Hence, we revised our sum-of-parts TP to S$7.84 based on: 1) attractive dividend yield of 7.5 per cent; 2) current strong refining margin and high crude prices; and 3) relatively cheaper valuations compared with regional peers.

-Research Report by DBS Group (April 23)