SPC Research Report

by DBS Group (11 June)

REFINING margins (Reuters' Singapore complex margin) continue to exhibit high volatility - it touched this year's low of US$4 per barrel (bbl) in early January and peaked at US$13.30/bbl in early April.

Margins averaged $6.90/bbl in Q1 2008 and US$8.80/bbl for the quarter to date. Current refining margins are hovering at US$7-9/bbl, supported by exceptionally strong middle distillate (diesel and jet fuel) crack spreads, but offset by soft petrol and fuel oil spreads.

Given seasonally strong refining margins in Q2 2008 and the strong crude oil price, Singapore Petroleum Company's (SPC) quarterly results should peak in Q2 2008. We expect it to book US$8.50/bbl refining margin, up from US$7/bbl in Q1 2008 but below the $9.50/bbl in Q2 2007.

Exploration and production performance should also be boosted by strong crude price; we expect Brent crude to average US$118/bbl in Q2 2008, up from US$97/bbl in Q1 2008. Net profit should jump 81 per cent q-o-q (but flat y-o-y) to $177 million.

We raised FY 2008-09 forecast net profit by 8.4 per cent and 10.1 per cent, respectively, to reflect current strong crude prices, but maintain our refining margin assumptions.

At the current price, SPC is attractive for the following reasons: limited downside risk from current level, strong Q2 2008 results should be near-term share price catalyst, attractive dividend yield of 10 per cent, and 30 per cent upside.

The counter is trading at a 2008 P/E of only 6 and an enterprise value (EV)/Ebitda multiple of just 4.2 versus regional peers' (excluding-Japan) 2008 P/E of 8.7 and EV/Ebitda multiple of 5.7.

-Research Report by DBS Group (11 June)