FREE Special Report: Oil Sector Outlook and Recommendations (June 2017)
Our Partner Broker’s Analysis
Potential increase in excise taxes
If House Bill 5636, which was approved by the House of Representatives last week, will not be amended and eventually passed as law, then the excise tax on petroleum products will increase over a three year period. The current version of the bill shows an increase excise tax on diesel, bunker fuel and LPG per liter from zero to PHP 3, PHP 5 and PHP 6; gasoline per liter from PHP 4.35 to PHP 7, PHP 9 and PHP 10; lubricants per liter from PHP 4.50 to PHP 7, PHP 9 and PHP 10.
PCOR and SHLPH expect minimal impact
We consulted the management of PCOR and SHLPH and found out that both companies expect little impact on sales volume due to the inelastic demand for petroleum products. As for spreads and margins, the companies won’t be affected as well since the added tax cost will be passed on to consumers.
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Sensitivity of our target prices to changes in volume sales assumptions
Our base case assumption is that the sales volume impact of the higher excise tax will be offset by the improvement in purchasing power due to the proposed income tax reduction. On a bull case scenario that the higher purchasing power will more than offset the higher excise tax, a 1% increase in our volume assumptions will result in a target price upgrade of 2.4% and 2.5% for PCOR and SHLPH, respectively.
On a bear case scenario of the excise tax more than offsetting the purchasing power increase, a 1% reduction in our volume forecasts will result in a Target price cuts of 2.4% and 2.6% respectively.
We prefer PCOR over SHLPH
PCOR has cheaper valuations than SHLPH, higher market share, and more complex refinery.
Our Partner Broker’s Recommendation
Petron Corporation (PCOR) — Buy, PHP 13.95 Target Price
Pilipinas Shell (SHLPH) — Hold, PHP 63.49 Target Price
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