SKPETRO @ 3.08: A Good Buy or Goodbye? (9 Nov 2014)

P/E : 16.2 (3.08/0.19 – closing price @ 7/11/2014)
Forward P/E : 9.66 - Pass
3.08 X [(Q1 2014~8.5, Q2 2014~7.44) X 2 (annualized it by X2)]

P/BV : 1.77 - Neutral
Dividend per share : 0.0235 (2011 0, 2012 0, 2013 0, 2014 0.235)
Dividend Yield : 0.763% - Fail

Current Ratio : 1.07 – Pass
Quick Ratio : 0.89 – Neutral
Debt/Equity Ratio : 1.61 – Neutral
Interest Coverage Ratio: 3.45 - Pass

A lot of speculations out there lately trying to guess where is the lowest point of Crude Oil price. USD80, USD70 or USD 60? How about SK Petro? Bottom at 3.08 and to rebound soon as most argued and some minority predicting it shall go lower. Who is better in predicting future price? The optimistic or the pessimistic?

At Invest Coach, we have no crystal ball for this. I do not know. What we do is to evaluate the deal and make the best Investment Decision based on evaluation.

Historical PE at 16 is not considered cheap but it is acceptable for Big Cap organization. We evaluate further by using latest 2014 Q1 and Q2 EPS which comes at 8.5 and 7.44. We annualized it by X2 = EPS 31.88. Using current price 3.08, we have a FORECAST 2014 FORWARD PE of 9.66. Now relook again, for a Big Cap company, forward PE of around 10 seems attractive. Let’s drill deeper;

Out of all the ratios we used, it failed only 1 which is Divided Yield. SK Petro has no record on giving good dividends. For this round of analysis, I am adding Interest Coverage Ratio and putting a higher demand on their D/E Ratio. Reason being, SK Petro is famous for their high gearing thus we have to exercise extra cautious on this stock. It end up ACCEPTABLE in our risk appetite.
(Note: To gauge on our Risk appetite on Liquidity Ratios and Solvency Ratios, please refer to our Investment Book Guidelines: Create a Secondary Income Stream by Chua I-MIN, CFA (page 53 ~ 58).

This round, I am also adding some thoughts on the Economic Analysis and Business Analysis model:

Economics of drilling, some drilling activities shall be stopped if oil price touches USD75 and below.
Some good ones able to drill with the cost of USD65 and the bad ones at USD90. The best drillers in the world do it around USD50. What’s next: I DO NOT KNOW. How about business analysis on SKPetro? The price has dropped from the high of 4.96 to 3.08. A whole 38% dropped even before market crashed. A lot of retailers out there is buying now. Base on fundamental valuations it looks acceptable. How the price will perform next? Up or down, I DO NOT KNOW.

AS A MINORITY, WHAT AM I GOING TO DO?

‘Base on info received, value and react!’

1. If I do not have SK Petro shares:
Buy at price 3.08 (Forward PE 10) is REASONABLE but not cheap, to deploy 20% of my intended funds for SK Petro at 3.08.
To deploy another 20% at PE 9 +- : Price around 2.87
To deploy another 20% at PE 8 +- : Price around 2.55
To deploy another 20% at PE 7 +-: Price around 2.23
To deploy my last 20% at PE 6 +- : Price around 1.91 (near to lowest post IPO on 2012)

2. If I do have SK Petro shares:
To consider average down below 3.
Break your cash into 5 stages and starts accumulating around PE 9 +- and below.
Be prepared to hold long term WITHOUT DIVIDENDS. If you are not able to tolerate for LONG TERM INVESTMENTS and NO DIVIDENDS, DO NOT AVERAGE DOWN.

3. Keep in view 3 things:
i: monitor the OIL PRICE – price will stabilize at one point of time. You may see the price trading few dollars in range with no further drops and good news starts being reported. From there only starts to deploy your funds in if your bullets is not much.
Ii: try not to guess the lowest point for OIL and SKPetro price. Most of the time, we are wrong
and the market is correct.
Iii: do not go ‘ALL IN’ aka ‘SHOW HAND’ in 1 counter at 1 go. You will not be able to sleep well at
night. Effective Portfolio Management is part of the game.

P/S: Put into consideration of SKPetro designated as Non Syariah compliant securities by End November.
I am in no hurry to accumulate SK Petro by letting the big boys do their ‘Institutional Portfolio Restructuring’. If SK Petro is not being designated as Non Syariah Compliant and OIL Price recovers, I can always do average up and do my ‘Portfolio Restructuring’.

Disclaimer and Declaration
The full content of the article is for educational purposes only and should not be used as investment recommendations. We are not responsible for all investment activities conducted by the participants and cannot be held liable for any investment loss. Examples of specific shares may be citied for
illustration purposes.

Regards,

Humble Pie,