Shell is a very stable company. Their core biz is in oil & gas. Look into oil sector. i think everybody know that oil price increases sharply during 2007. JAN 07, crude oil is USD 55 per barrel; currently, crude oil is around USD 95. Rough calculation, it increases 90% this year. If you compare the crude oil price with Shell EPS, will find that they are directly proportional . means crude oil price is giving impact directly on Shell EPS. But, since JAN 07, Shell only rose from RM10 to RM11.50, only 15% gaining. Compare to Petronas, its share price rose 100% from RM4 to RM8.
I have studied Shell financial reports from 2001. Its 7 years ROE average is 25%. This is an excellent number for a giant company. Public bank only manage to maintain ROE between 17% to 22%. So, Shell management is excellent in capital management.Current year, estimated EPS is around RM2.00. Compare to RM11.50, its current PE is 5.5 (very low!).
At 2001, Shell equity is RM744 million. 2007, its equity is around 2400million. 1500 is one times, 3000 is two times. Shell only takes around 7 years to double its equity twice, average 3.5 years to double once. According to rule 72, its growth rate is 21%. quite matching its ROE.
For EPS in 2001, it was RM0.25. Current FY, EPS is RM2.00. it has double 3 times over 6 years. Growth rate at 36%. This mainly due to increment of crude oil price. Crude oil at JAN 2002 was USD 20 per barrel. its growth rate also around 30% over 6 years.
Shell is having RM478 million long term loan with cash in hand is RM372 million (updated from quater 3). The loan is in USD, due to Ringgit is growing stronger, the loan amount is expected to be reduce. i think, at 4th Q, shell is having net cash in hand.
From points of investment, Shell is having a high "moat" biz. Petroleum liciense is limited. the players in malaysia market are BHD, Carltex , Petronas and exxon mobil. These big players are considered monopoly the market. then, their biz is simple and easy to understand. If the management continues excellent, then their earnings are rely on crude oil price. Not affected by demand and supply. In addition, they have high ROE, means excellent management team.
From 2002 reports, Shell is keeping average 3million crude oils stock every year. When crude oil price increases, their net asset and sales and increase as well. And oil never depreciation likes machine/products/cloths by ages.
Let us reveiw some risk.
1. if oil price drops. Please look at the changes of share price this year, shell only gain 15%. means, it will not be over price, unless oil price drops more than 75%. this is a very safe margin. Somehow, i do not foreseen any reason that oil price will drops sharply these years.
2. Shell growing is limited. If oil price inflation is 15 to 20% per year, their EPS growth will be more than 20% per year. Even oil price maintain in the next 5 years, shell maintain EPS at RM1.50, its reasonable price is RM 25++ (PE=12). coz its current PE=5.5 is extremely low.
3. Current Shell price at RM11.50 is the historical high. Do not forget that, share price only reflected the share value. If the share value keep on gaining, there will never be the highest price or over price problem. Look at Digi. you never can predict the high and low point. Let us get back to fundamentals.
based on margin of safety calculation, can get from www.ruleoneinvestor.com i found that safety price is RM18. Shell is just 20% of its intrisic value.
I already bought 600 units for mother (average price at RM11.40), 200 units for my girl friend and 100 unit for myself (RM11.50).
If anybody has comment about Shell, you are welcome to discuss at my blog
www.tan81.blogspot.com
Good luck!
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2007年11月15日星期四
Shell Refining (4324)
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28 条评论:
Hi Tan81,
I'm beginner from OO blog. I'm learning the calculation of EPS growth rate lately.
The formula is as
EPS 2nd year - EPS 1st yr/ EPS 1st year X100%
But i dunno how to do it with minus EPS as
Year EPS
1998 2.5
1999 -19.1
2000 23.2
Q: what is the EPS growth rate for year 1999 and 2000?
year 1999 is
-19.1-2.5/2.5 X 100% = -864%
This figure is correct? And how about year 2000? Do you have idea?
Thanks.
hello beginner,you welcome to visit here.
year 1999 EPS is correct, since it is from earning 2.5 sen downturn to -19.1 sen, so, the rate is -864%.
year 2000 is [23.3-(-19.1)]/19.1X100%, answer is 222%.
but, i have to remind you that, there are many company that continuos earn money every year, why you have to invest in a company that has loss records? So, i think the study above is not practical, so sorry to say that.
i will avoid this type of company to avoid my risk.
thanks and hope to see you here oftenly.
Hi Tan,
Thanks for your advice. It is data from F&N. only year 1999 with minus figure, others EPS still ok, 20-40. I haven't started investment yet actually. Still studying and got so many things i dun understand it. Really need you guide always. My name is Kim.
hello,
Kim, nice to meet you. I have some little advise for you. After you figure out the companies that you like, then compare their financial stats. Next step is doing the goal setting. You have to ask yourself, what is the purpose that you want to invest? earn pocket money? get rich from investment? or want to financial freedom? invest for retire?
Everybody must have a goal to do something, if not, will easily lost, especially in share market.
Anyhow,do not spend too much time for thinking this. Start to action afterthat.because experience is from action,never from studies.
I will study F&N. come back to you after my studis. maybe next week. cause this week, i am going to singapore for T-Harv Eker workshop. He is the writter of "the milionaire mindset".
Good luck!
Hi, I'm a new visitor here.
your articles about investment are very good. pls keep on sharing.
about Shell, I was investing in it too. But you have to be carefull, Shell's earning growth since 2004 is largely due to the growing of inventory's value. When the oil price drop one day, its earning will drop significantly.
my opinion is, Shell is a good company, it has a high ROE as you said. But it's not a growing company. pls check its annual report, its revenue growth in recent years is mainly due to the rising oil-price, not capacity.
hi,value investor.Thanks for your opinion and very happy that somebody give another point of view. To start our discussion,lets me take figures from 2002 till 2007.
Crude oil price at end of 2002 was USD25,EPS of SHELL was RM0.51.Oil price now is USD90.EPS is ard RM2.00.
oil price growth at 28.8% yearly,EPS also growth 28.8% yearly.I agree with your point.When oil price falls,EPS is expected to drop.The question is current price worth to buy?
My article already show that current price with a safety margin.Even oil price falls,if not more than 70%,i think shell is still under value.
For definition of growing,refer to Warren Buffet,there are 2 types.grow in revenue or sales and grow in increase selling price.If you can find a company that have both growing,congratulations!But it is too ideal.
Warren Buffet prefer 2nd type,if grow in price does not affect their sales,means the consumers have to buy products or service from them. They have strong MOAT or high entry barrier.
I do not expect Shell to grow in revenue sharply,even oil price ups,will never affect its biz.
growing in revenue always means that company biz in hot line,this will bring in more competitors and normally they do not last for 5 years.I think TopGlove is example.
peter lynch and warren buffet prefer company that not grow in revenue if they can't find a company like Nestle that can achieve both.
I think you didn't get what I mean.
my point is, during the last five years, shell's capacity and sales (in terms of volume barrels) is quite stable and not increasing. While increasing the selling price of its product, the cost of raw material (crude oil) also increase. Then, how its profit rise? actually, an significant portion of the higher profit comes from inventories gain, this will reflected on the income-statement as higher profit margin, and reflected on the balance-sheet as increased value of inventories.
Take an example... in previous quarter (3 months ago) crude oil price is about USD70 per barrel, shell bought some crude oil and put them into its inventories. Then, in this quarter, crude oil price is about USD90. the refined products' prices should be increasing with synchrony of crude oil, so shell can sell its products at higher price. It its income statement, shell will record that: it make use of the USD70 inventories as feedstock, than selling the product at current high price. The result will be a higher profit margin, thus higher earning. And the inventories value in its Balance-sheet also increase (from USD70 to USD90 per barrel).
so, shell's profit margin is higher when oil price is in an upstrend. The margin will be lower if oil price is stable and flat. the margin will become worse if oil price is in a downtrend.
of course, the profit margin will be affected by others factors like demand-supply condition.
So, the reason of Shell's growing EPS in recent years, is because the oil price was in an uptrend, and the trend became steeper and steeper.
We no need to wait for the oil price to drop... When the oil price uptrend is at its end and the price become stable, Shell's EPS will drop significantly... at least 25~30% (my own estimation, not justified).
erm.. very good sharing and thinking point.Before that, i really didn't get your points.
I agree with you.you have point out something that i never think about it. i think that is experience. really thanks for your sharing.
definately, you are right about the point of Shell get EPS growth at uptrend of oil price.
I am looking more advise from you,coz there is something that i really not sure.Hope you help me in this point.From Apr07 to Aug07,oil price remained flat.how can Shell still maintain for EPS of RM0.50 during that period? Sep07 till Dec07,oil price shoot up dramatically.Is this mean the final quater of EPS will be more than RM0.50?
If oil starts to drop next year and causing Shell EPS drops 50%. Estimated EPS for next year is around RM1.00.Refer to current share price at RM11.00, PE is 11x. Shell historical PE is around 10x. I think now still a bargain buy as current FY PE is only 5.5x. means Shell EPS drops to 50% still not expensive,if compare to historical PE.
What do you think?
sorry... I'm not able to answer your question about shell's Q3-2007 performance, nor can i predict its Q4 performance. Because I didn't have much time to do more research on Shell.
But you must bear in mind that my previous example is just an simplified illustration. The real situation of buying feedstock and selling product is much more complicated. And please don't simply relate the short-term financial performance to the crude-oil spot-price. Most of the Shell's feedstock is not bought from spot-market, instead the buying process normally is done through something contract-basis.
and pls don't pay too much attention on quarterly reports, they are unaudited. And as you said, you are a long-term investor, right? So, better pay more attention to the annual report.
about the real earning power of shell, what i can say is, for a conservative valuation, we must deduct the "stockholding gain/loss" from its recorded profit. because this "stockholding gain/loss" is affected by the trend of oil-price, and Shell has no control-power on the movement of oil price.
However, I still think that Shell is a good company. My own estimation, its current share price is about 8x of its EPS. So, the price is not too high.
Shell has quite a good dividend-payment record too. and, as you said, this industry has a good "moat", Shell is facing only a limited number of competitors.
The reason I don't hold Shell is because I'm looking for something better, which can give me a good investment return of 20% p.a. My own opinion, Shell's has less promiss to give me this return in future years.
do not say sorry. you already help me a lots. I appreciate your advice.
I think the idea of deduct the "stockholding gain/loss" from its recorded profit, is good and fair enough for getting Shell real earnings.I will work this out and publish here.So, you can comment after that.
I do not mean to take the quater report as reference.When i study the stock performance,used to look at their 10 years figures (if they have).Very hard to explain about it over internet.Never mind,forget about this "quater" discussion.
I agree with you that invest in the company that provide more than 20%p.a. return. Maybe you do not believe,but i select Shell as this is one of the attracting point.
Shell 5 years average ROE is 26%.Lets say next 10 years,it able to maintain ROE of 20%,from 2007 NTA=RM8.00 will grow until 2016 NTA=RM41.28.Current EPS for 2016 is RM8.25.If PE is 11x, the share price on 2016 is RM80.From my buy in price=RM11.50,every year it grows 24%p.a., in order to achieve RM80 on 2016.These calculation is not include Shell dividend. Actually, dividend is not an issue as it is paying cash to shareholders,so shareholders has no loss from NTA reduction.
Shell is nearly a net cash company. it has long term debts that equal to one year earning. So,ROA is not much difference from ROE.They do not rely on debts to expand (and they are not expanding!).
I also spotted PLUS and Nestle by using same calculation.cause their ROE is stable.only reliable historical ROE,then we can apply this calculation for next 10 years.MOAT is there.unfortunately, refer to buying price now,Nestle and PLUS provides lower return p.a (less than 20%),but still better than Public bank.
If you spot any company and do not mind to share,please let me know.we can work out the calculation together.enjoy to talk with you anyway.
Thanks!
I still got some comment on your calculations. A large portion of Shell's earning (excluding the inventories gain) is ectually being paid out as dividend. So, my opinion is, do not ignore the dividend of Shell. (In fact, one of the reason I bought Shell last year is because it can give me a stable dividend income.) after paying out the dividend, the growth of NTA will be much less than your calculation.
and even the NTA is growing, it doesn't promiss the profit will grow with same rate. (What past performance is not a guarantee to the future). Shell's business is a refinery plant. So, there's only two way to increase its earning. First, increase the production capacity. Second, increase the margin spread.(the difference between product's price & raw material's price).
I haven't seen any future expansion plan from Shell, so i guest it's going to maintain the same capacity in the near future. So, the only growth factor for Shell is the margin spread. This in-turn is affected by the demand-supply condition of the refined-products of Shell.
So, ask yourself, do you think the demand for Shell's products is growing at a pace that can give it an earning-growth of 20% p.a.? any supporting figure? or it is just a prediction?
(OPEC members decided not to increase the production of crude oil, because they are in opinion that the supply-demand condition of crude oil have no sinificant change.)
p/s: nice to talk to you too. If you have time, pls visit my blog. (my blog is a quiet one, only 3 or 4 new post every month.) In my portfolio, I hold a stock named TITAN, it is in a similar condition as Shell. I'll write an article soon about Titan's future prospect.
I really appreciate if you can give me some comment especially some opposite opinion. because people always can't see their own mistake without others people's comment.
every comment that you post,bring me a new question in my investment.I have to think seriously to get the answer.Thanks,my friend.
I think this time,i have to longer time to get answers.
haha.....
I have sold Shell 500 units@ RM11.30.
The reason is same as selling AIM last week,to obtain some cash to handle my cash liquidity problem.
there is a small portion of reason is also because i have not figured out the true earning of shell,too.
So, i decided to keep cash and hold a small portion of shell at the moment.
I have lost RM130++ as the lost of price difference and commission.
I shall take this as a lesson.
Take note of the accounting standard adopted by SHELL in inventory costing, FIFO (First In First Out). This will affect the profit in P&L when calculating the cost of the inventory.
Another notes for consideration is, Shell listed on Bursa is a REFINERING company. The profit relates to the refinering margin.
Is NTA really important?
NTA is a valuation on equity, which is derived from valuation of Assets.
Question: Do you know how asset is being valued, and what method the accounting is used in such valuation?
NTA has no meaning until the company is liquidify.
What an investor should look for is the cash earning capabilities from a company, neither EPS earning per share nor NTA.
前辈，我想你的回复是源自于Cari的留言。
谢谢你的指教。不过，看来你的性格很冲动，而且是非常性急的人。
先正面回答一些问题：
我没有说NTA很关键。
我是完全没有Accounting的基础。
NTA和股价的数字相比，只是锦上添花。但，我没有说是值得买入的绝对指标。
如果你有看我在Cari对airasia 的看法，应该了解我选股的原则，是注重现金流的。我买的股票，除了Shell有些微负债，其他的都是净现金。如果你有时间证明我错了，可以到所有公司的年报上，慢慢审查。
没有生气前辈的意思。只是想表明我的看法。相信没有人喜欢别人把他的话，套在自己的身上，对吗？
还是希望你继续发言，因为很明显的，你是很懂Accounting的知识，会帮助我们这些完全不懂的投资者。
新年快乐！
yesterday,4/3/08.
I bought in Shell, 100units@RM11.00 again. The cost that i paid is RM1115.
today,5/3/08.
I bought in Bursa,100 units@RM10.00 as it is having a big slip recent days. The buying cost is RM1015.
Hi Tan81,
Can you explain why the reasonable price is RM 25 or PE should around 12? Thank you.
According to Shell Historical PE , it is around 10X. So, i think it is reasonable to set it at around 10.
why you think it is not reasonable?
Thanks for sharing.
Tan,
I just wanna know how u get that figure. What is ur opinion of this stock having good ROE, PE, NTA, but why the price keeping low as that?
No idea. it is market fault?
there are so many examples of market is irrational in short terms.
So, sometime it is pointless to figure out why market give the stock such a price.
Tan,
I was thinking whether is their "stable" production making ppl no interested on that, anyway, thank you. i get a lot info from ur place.
I have a good news to tell you. About Shell,i already confident to obtain their true earnings power.But i need to use a lots of graph to explain this. I am not a good PC user.expecially graphic. If you drop by again in these few days, i sure that you will be happy with my research and conclusion.
Thanks for your time.
Hey Tan,
Where is your homework? I am waiting for it! hahhaah...just kidding, i am looking forward your research, i just brought shell 500 units, and this is my very first time to buy share.
Ｊ，
对不起，让你久等了。
我还很懒惰。
作为新人，我只能劝你，不要急于买股票。
股票，只可以慢慢买。
Thanks ur advice,i agree with that. That is why up to now i have a lots idea share but i just brought Shell only, i have confidence on their perfomance, hopefully their price will growth as their perfomance. Hopefully we both choosing the right share. All the best.
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