· Net profit was at the low end of our estimate; excluding E&P asset impairment, core profit exceeded our expectation due to reversal of inventory write-down
· Mixed surprises: E&P loss was disappointing, but operating profit from refining jumped unexpectedly despite weaker refining margin
· Earnings forecast and target price are under review pending a conference call with the company, but we maintain a Fully Valued rating because valuation is expensive
Refining margin was within expectation at US$4.5/bbl (down 36%), but refinery utilisation rate was better than expected at 93%. Refining operating profit jumped 45% due to a reversal of inventory write-down from the previous quarter.
The E&P business reported an unexpected operating loss of S$18.2m, which included S$7.8m exploration expenses from Vietnam and Cambodia projects. This implied that break-even cost for E&P might be in the high US$40+, higher than our c.US$40 estimate. Earnings were also dragged down by S$43.3m non-cash impairment charge for the Jeruk project due to high uncertainties under the current oil price environment.
We remain cautious about SPC's earnings outlook for both the refining and E&P units. For refining, the unexpectedly strong profit in 1Q09 should be one-off. Meanwhile, weak oil demand and surplus capacity will remain major threats to refining margins. Our current estimate is being reviewed for a downgrade following the weak E&P results in 1Q09. SPC's share price has surged 52% YTD, outperforming the STI's 6% rise. But at 8.6x 2009 PE, the counter is expensive compared to 2005-09 average PE of 6.5x. Maintain Fully Valued.
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