Investment bank upgrades oil marketers’ profit outlook

By CHARLES MWANIKI

A local investment bank has upgraded the outlook on the stocks of KenolKobil and Total Kenya, predicting that the two oil marketers will benefit from improvement of profit margins in the current financial year.

Standard Investment bank (SIB) said in their oil industry update released Tuesday that the sector is likely to be one of the key beneficiaries of an expected growth of the economy, and has backed the two companies whose earnings were affected by a series of challenges in 2013/13 to bounce back.

“While we are concerned about the low margin nature of the downstream business, and disappointing 2012 earnings, we expect solid improvements in 2013,” said SIB.

“We see the discovery of petroleum resources in the region being positive for margins on domestically sold fuel despite price controls. Volume demand growth will also be boosted by GDP rise.”

SIB gave Total Kenya a fair price valuation that is 151 per cent above its current trading price, an upgrade to Sh37.68 a share compared to Sh15.05 on Tuesday.

Strong earnings

In justifying the big fair price upgrade, SIB said they expect an “extremely rewarding” year for Total Kenya for the 2013 financial year, with the company expected to leverage on its brand equity to deliver strong earnings.

SIB revised its estimation of Total’s earnings upwards by 12.2 per cent to Sh119.1 billion compared to previous estimates posted in February.

On KenolKobil, SIB said that the company will benefit from normalisation in margins and more aggressive working capital management, coupled with the possibility of a more cordial relationship with other industry players following a change of CEO.

SIB give KenolKobil’s share a fair value upside of 29.3 per cent, placing the share on Sh11.51, as compared to today’s price of Sh8.95.

KenolKobil is coming from a difficult financial year in which it posted a record loss of Sh6.3 billion as a result of losses on hedges, inventory write down, interest expense and other restructuring costs, coupled with a failed takeover bid by Swiss firm Puma Energy.

The company’s share also came under pressure following a suspension from the oil importation stream, although that dispute has now been settled with the refinery and the share has been on a slight recovery plane.