FINANCIAL RATIOS ANALYSIS3
Analysis of SPC’s beta5
Comparison to peers’ beta5
STOCK PERFORMANCE ANALYSIS6
COST OF EQUITY8
COST OF DEBT9
Analysis between competitors9
IMPACT OF CORPORATE EVENT10
Reason to such a huge reaction11
Potential effect on SPC’s future performance11
Beyond the conventional CSR efforts11
Singapore Petroleum Company (SPC) is a Singapore-based oil company. Its principal activities consist of refining services, exploration and production. SPC’s core earnings driver is its refining business, making up 98% of its sales revenue. It provides oil products primarily to the Singapore market. It is also the dominant jet oil supplier in Changi Airport. Exploration and Production (E&P) forms a mere 2% of its entire business. In order to increase their regional footprint, they acquired Bohai Bay Blocks, China, Oyong and Kakap Blocks in Indonesia in 2007. SPC’s corporate strategy is to expand its E&P business by further investing in oil and gas producing assets, while developing the existing acreages. This would enhance shareholder value and ensure long term growth.
Source: Company Data Source: Company Data
The oil refining industry poses high barriers to entry and exit due to the high capital investment required. Thus, this industry is oligopolistic in nature and is dominated by only a few large players. In fact, much of the energy industry is ruled by large, vertically integrated oil companies. These companies look after all factors of production, refining and marketing.
The refined oil products market is boundless: companies can set up refineries and sales outlets in other countries to increase their distribution network. As Singapore’s only home grown oil refiner, SPC faces little competition in the domestic market.
In terms of market capitalization and business activities, SPC is a small player in the regional market. Its most comparable competitor in the Asia-Pacific region is Cosmo Oil, a Tokyo based oil refining company. Other competitors include Royal Dutch Shell (Shell) and Exxon Mobil (Exxon). We will compare SPC’s financial ratios, stock fundamentals and capital structure with its peers, so as to evaluate SPC’s business efficiency and the value-creation for investors vis-à-vis other oil companies.
FINANCIAL RATIOS ANALYSIS
|Profitability Analysis | | |SPC |Cosmo |Shell |Exxon | |Return on Assets (%) |14.41 |2.50 |16.30 |17.85 | |Earnings per share (EPS) |0.69 |0.47 |4.47 |7.28 |
As a relatively small player in the oil industry and having the smallest market capitalization (refer to appendix 1), SPC is able to achieve comparable high net profit margin of 5.8%, rivaling even huge player Shell – and this is due to the high net profit margin that is derived from its E&P (36%) business. But the net profit margin of sales of oil products is very low (at only 6%), indicating there is a long way to go before SPC can earn the sterling results Exxon Mobil has (11.3% profit margin). SPC’s high ROA and ROE ratios reflect management’s efficiency in utilizing assets and creating value for investors.
Oil companies are notorious for reporting non cash line items in the income statement. By stripping away all the non-cash entities, we can get a truer number because cash flow cannot be manipulated as easily as net income can. SPC’s cash EPS of $0.50 is an indication that it is in good financial health. However, Cosmo appears to be having cash flow problems as shown by a negative Cash EPS.