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Petroleum Industry of Serbia (NIIS) - 9M18

Petroleum Industry of Serbia (NIIS)

After worse than expected first quarter, Petroleum Industry of Serbia (NIIS) significantly increased its profitability in the upcoming period, with largest contribution coming by the higher price of crude oil, as well as the growth of the company's market share, especially in the third quarter. Now it is already certain that NIS will surpass the last year's result at a two-digit growth rate.

In the period January-September, NIS recorded 23.2% revenues growth to RSD 206.8bn, primarily due to 39% jump in crude oil prices. Large contributor to revenues growth was also the sales volume growth, which jumped 9.5% in the first nine months. EBITDA rose 22.7% to RSD 42bn, while net profit increased by 8% to RSD 21.7bn. In its third quarter only, NIS recorded a net profit of RSD 10.2bn, which is 33% higher than the same quarter last year, certainly supported by the market share growth in Serbia by almost 2%.

¤ Dividend - The company will payout 25% of net profit next year, and this payment ratio is unlikely to change until the end of major investments. The expected dividend from this year's profit is around RSD 47 (6.9% yield).

¤ CAPEX - NIS invested RSD 27.3bn (+ 64%) in 9M, and about 38% of the funds was related to the deep processing project, which will make most of this year's investments (estimated at RSD 43.2bn, + 63%). This key project for NIS should start operating in 3Q next year.

¤ Expectations - In October, NIS reported a record result due to favorable business conditions (high prices of crude oil and low Danube water levels). The management expects EBITDA of around RSD 55bn annually and net profit at around RSD 30bn.

¤ Valuation - Despite better than expected business results and the expected dividend yield at its highest level since the beginning of the oil crisis, NIS's shares are under great sell pressure. The main reason is the sharp downward trend in the crude oil price in the last few weeks, as well as the absence of larger portfolio investors, which leads to a selective reaction to essential information (there is no effect on positive important events). NIS is traded on the expected PE of 3.7x and at 45% of its book value, but attractive fundamentals could be somewhat endangered next year in the event of continuation of turbulence in the crude oil market. This year's average Brent price (around USD 73 per barrel) has made the greatest contribution to the growth of profitability, and it is difficult to expect the return of investors in the case of a continuous deterioration scenario in the crude oil market.