Singapore Petroleum - Expect record 2Q on strong GRM; 3Q so far so good; Buy, TP S$7.20

Source of opportunity
We expect SPC to announce its 2Q07 results after market close on July 25.
We continue to expect 2Q07E net profit to rise 8% yoy and 31% qoq to
S$147 mn, which we believe would be a record high for SPC, on the back
of strong gross refining margins (GRM). The Singapore complex GRM
averaged US$11.22/bbl in 2Q07, up 5% yoy and 42% qoq respectively. We
expect SPC’s 2Q07E GRM to be about US$9.50/bbl vs. US$8.00+/bbl and
~US$7.00/bbl reported by SPC for 2Q06 & 1Q07 respectively. We reiterate
our Buy rating on SPC and our 12-m target price of S$7.20 (6X 2008E
EV/EBITDA), implying potential upside of 14% plus a high div yield of 6.8%.

Catalyst
We expect the 2Q07 results to be a positive catalyst. In addition, 3Q07 qtd
Singapore complex GRM are averaging US$10.54/bbl. While that is slightly
lower than the US$11.22/bbl recorded in 2Q07, it is up 56% yoy vs.
US$6.74/bbl in 3Q06. Also, we haven’t seen weather-related disruptions
like hurricanes so far in 3Q07; given the tight demand-supply balance of
the global refining system, we think any such disruptions could potentially
lead to spikes in GRM even from their current high level. Given that the 1H07
average was US$9.56/bbl and our full-year 2007E estimate is US$8.50/bbl, as
long as the average in 2H07E remains higher than US$7.50/bbl (the spot is
now US$9.80/bbl), we see upside risk to our estimates which are already
above consensus and a possible further share price re-rating.

Valuation
SPC is trading at 7.3X and 5.1X 2008E P/E and EV/EBITDA, lower than the
7.4X and 6.0X for the Asian refining median respectively. SPC is one of the
few energy stocks we cover where we see a sizeable potential upside.
Key risks
Demand slowdown leading to lower-than-forecast refining margins, further
upstream project delays, and unstable earnings from trading business.