PVD: Oil price crash crushes the valuation
20/03/2020 - 09:20
TP upside +28.8%
Price VND 8,100 12M
Target VND 10,429
Previous Target VND 19,896
► Drilling related and trading businesses will be hit by lower oil prices.
► We adopt EIA’s reduced (-34%) 2020E forecast for Brent of $43 per barrel. We also use their 2021 forecast of $55.4.
► We trim our target price by 47.6% to VND 10,429 per share. The new target price implies 0.31x book value.
► It is extremely unlikely that the Brent will double to US$60 levels this year.
► We cut our 2020 PATMI forecast contracts by 84% to VND 50bn (-73% YoY).
► Further downside risks from contract termination or day rate revision.
► Downgrade to HOLD-Outperform vs the previous BUY. Catalysts for a rerating are distant, but downside is limited at 0.3x 2019 P/B.
Oil price crash. Brent is currently trading at USD 26.6 per barrel, a decrease of 61.4% since the 2020 peak in early Jan after the OPEC+ squabble and COVID-19 outbreak. Last week, EIA cut its 2020 Brent forecast to USD 43 per barrel, -34% lower than its Jan forecast. Street estimates have likewise been cut to the USD20-30per barrel range. Oil price forecasts are beyond our remit, but we think that it is extremely unlikely that the Brent will double its price and resume USD 60 this year.
Drilling-related business and trading activities will be hit. Historically, when Brent is below $60 for more than 3 months, it has triggered long term negative changes in regional rig utilization and day rates. We assume that its jackup drilling business will remain intact with the average day rates USD65,000, equivalent to 10% YoY increase under its signed contracts. We have to assume that land rig still remains idle for 2020 unless PVD announces that it has secured a contract. Model revisit.
We cut our 2020E revenue forecast by 26% compared to the previous forecast to VND4,262 bn (-2% YoY). The revision is mainly driven by significant reduction in drilling services and trading revenues. We cut our 2020E PATMI forecast by 84% to VND 50bn (-73% YoY). PVD also has VND 255bn bad debt, of which VND 201bn has been provisioned. We do not factor this into our model despite management’s confidence in its ability to collect on these debts.
We trim our target price by 47.6% to VND 10,429 per share, which implies just 0.31x 2019 P/B. Our target price is weighted 50% each to our FCFE model and EV/EBITDA multiple approach. At this stage, the stock offers deep value but the main catalyst for a rerating – an unexpected rise in oil prices – seems to be extremely unlikely in the near term. Thus, we downgrade our recommendation to HOLD-Outperform from the previous BUY.
For the complete report, please access here:20200318 PVD updates
Analyst: Binh Truong, email@example.com