The Shell Refining Company (Federation of Malaya) Berhad (the Company) was formed in 1960 and it is listed in the Main Board of KLSE on 29th October 1962 with 25% Malaysian public participation. Currently, the public participation is 49%. It operates with state-of-the-art technology and is the key supplier to Shell's Oil Products' businesses in Malaysia.
Shell Refining Company (Federation of Malaya) Berhad, is the only publicly listed company within Shell Malaysia. The company's oil refinery at Port Dickson produces a comprehensive range of petroleum products, over 80% of which are consumed within Malaysia.
While striving for maximum returns to our shareholders, your Company also believes in giving equal attention to caring for our environment and fulfilling our corporate social responsibility ("CSR") obligations by contributing to social development in our community. We actively encourage and support diverse wealth creation in the community, the development of new skills and expertise as well as the transfer of new technologies and best business practices to Malaysia.
MARKET ANALYSIS
Market Size
The size of the market can be evaluated based on present sales and on potential sales if the use of the product were expanded. The following is the information about SRC's sales over the 5 years interval:
2004
2005
2006
2007
2008
Sales
7510539
9695133
10886840
11415110
13086130
Based on the figure above, it's clearly shows that the net sales of SRC are increasing year by year. Therefore, it reflects that the market size of SRC is increasing as well.
Market Growth Rate
A simple means of forecasting the market growth rate is to extrapolate historical data into the future. One of the methods is to study growth drivers such as demographic information and sales growth in complementary products. The table below shows the summary of the sales growth in 5 years period:
2004-2005
2005-2006
2006-2007
2007-2008
Average
Sales growth (%)
29.09
12.29
4.85
14.64
15.22
INDUSTRY ANALYSIS
Today's oil and natural gas industry reaches around the globe, touching the lives of millions of people every single day. The Oil Industry is a very important industry in the world and a lot depends on the price of the oil and it has been observed that whenever the oil prices increase the price of various products also increases. The Oil Industry also through oil production accounts for a large amount of the consumption of energy. In this issue the Middle East is in the first position and the lowest consumption is done by the countries in Europe.
According to the statistics the amount of oil consumed by the world every year is as many as 30 billion barrel among which nearly 25 percent of the oil consumption is done by United States of America. The Oil Industry can be parted in two, Upstream and Downstream. The Upstream sectors includes the searching for potential underground or underwater oil and gas fields, drilling of exploratory wells, and subsequently operating the wells that recover and bring the crude oil and row natural gas to the surface. Then, the downstream oil sector is a term commonly used to refer to the refining of crude oil, and the selling and distribution of natural gas and products derived from crude oil. Such products include liquefied petroleum gas (LPG), gasoline or petrol, jet fuel, diesel oil, other fuel oils, asphalt and petroleum coke.
Oil reserves
Oil reserves are the quantities of crude oil estimated to be commercially recoverable by application of development project to know accumulations from a given data forward under defined conditions. To qualify as a reserve, they must be discovered, commercially recoverable, and still remaining. Reserves are further categorized by the level of certainty associated with the estimates.
There are top 20 nations of oil reserves:
Saudi Arabia has 261,700,000,000 barrels (bbl) of oil, fully 25% of the world's oil.
The future of oil and gas
The future of oil and natural gas can be seen clearly from the figures for world reserves.
Country
Reserves (billions of barrels)
Reserve life (years)
Saudi Arabia*
262.3
67
Iran*
136.3
90
Iraq*
115
156
Kuwait*
101.5
104
United Arab Emirates*
97.8
91
Venezuela*
80
79
Russia
60
17
Libya*
41.5
63
Nigeria*
36.2
41
Kazakhstan
30
59
Canada
25,6
22
United States
21
8
China
16
12
Qatar*
15.2
37
Mexico
12.4
9
Algeria*
12.3
16
Brazil
11.8
15
Angola*
8
15
Norway
7.8
8
Azerbaijan
7
30
India
5.6
19
Oman
5.5
20
Sudan
5
22
Ecuador
4.5
23
Indonesia*
4.3
11
United Kingdom
3.9
7
Egypt
3.7
15
Yemen
3
22
Malaysia
3
11
*Member countries of OPEC(Organization of Petroleum Exporting Countries)
It can be seen that just several Middle East countries, all OPEC members, account for 2/3 of world oil reserves. With a special mention for Saudi Arabia which possesses almost a quarter of these reserves. OPEC has 78 % of world reserves, whereas it currently produces only 43 % of the oil consumed worldwide - a situation that gives a very high number of years of reserves, approaching, or often exceeding, one hundred years. Thus the logical conclusion: the Middle East, already a strategic zone for oil production, is going to become more and more so as the years go by.
COMPANY ANALYSIS
Intrinsic Value
2004
2005
2006
2007
2008
EPS
2.2345
1.7404
0.8607
1.9774
(1.1001)
BV per share
5.2110
6.3970
6.4660
8.0200
6.4020
CF per share
0.5086
1.6635
(2.0636)
0.4240
0.3493
S per share
25.0350
32.3170
36.2890
38.0515
43.6200
2004
2005
2006
2007
2008
P/EPS
4.7896
6.1480
12.4317
5.4111
(9.7264)
P/BVper share
2.0533
1.6727
1.6548
1.3342
1.6714
P/CF per share
21.0372
6.4321
(5.1877)
25.2374
30.6342
P/S per share
0.4274
0.3311
0.2949
0.2812
0.2453
EPS= earning per share; BV= book value ; CF= cash flow ; S= sales ; P= current market price
Current price = RM10.70
Number of share outstanding = 300,000,000
From the above data,
STOCK
MARKET
Average
0.001423384
0.000101553
Standard deviation (ks-k bars)2
0.012701386
0.009156164
Total return
0.041460578
0.02154568
Variance
0.0001607
8.35104E-05
Standard deviation(km-k barm)2
0.012676747
0.009138402
Total return (ks-k bars)2(km-k barm)2
0.009342078
Covariance
3.62096E-05
Correlation
0.312568867
Beta
0.433594023
Risk free
2.01%
CAPM
0.011428793
Beta
0.433594023
SML
Intercept
0.001379351
Slope
0.433594023
R-Squared
0.097699296
By using the arithmetic average to measure the investment return, the value of the estimated beta (β) of the stock is 0.4336. This positive value indicates that the asset generally follows the market. However, the value of β is less than 0.5 (obviously less than 1). It means that it is less riskier compared to the market.
The security market line and a positive alpha stock
The security market line (SML) provides a benchmark for evaluation of investment performance. From the above figure, it shows that the security's risk versus expected return is plotted above the SML. Therefore, it is undervalued since the investor can expect a greater return for the inherent risk.
Key Financial Ratios of Shell Refining Company (FOM)
YEAR
Profit Margin
Return On Equity
Price/Book
(P/B)
Price/Earning
(P/E)
Dividend Yield
2004
8.93%
42.88%
2.0533
4.7896
7%
2005
5.39
27.21
1.6727
6.148
10
2006
2.37
13.31
1.6548
12.4317
8
2007
5.20
24.66
1.3342
5.4111
6
2008
(2.52)
(17.18)
1.6714
(9.7264)
6
Industry Average
6.5
17.4
2.0
10.8
4.0
Based on the profit margin ratio, the value is getting lower for the latest year and mostly lower than industry average. This indicates that the company will land in a bad condition if there is any changing in the market conditions or if the company is seeing increasing in competition or rising cost.
The ROE ratio is decreasing as well. It shows that the company is not efficient in generating profit from every unit of shareholders' equity.
Most of the P/B ratio is lower than the industry average. A lower P/B ratio means that the stock is undervalued.
On the other hand, the percentage for dividend yield seems to be higher than the industry average. It is a good sign for the shareholders.
As we can see, the company is going through a period of cyclical losses. From the P/E ratio as well, there is a low visibility of the company's future earnings prospects. The lower P/E ratio will give a bad impact to the investor's demand for the company share.
For the recent year, the company's common stock price taken from the P/E ratio (-9.7264) is obviously lower than the current market price (10.7). Therefore, it is recommended for the investor to sell their stocks.
