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Petroleum Industry of Serbia (NIIS), FY2018

Petroleum Industry of Serbia (NIIS)

Despite the growth of the most important financial and natural indicators, the Petroleum Industry of Serbia (NIIS) ended last year with a weaker bottom line result due to a new depreciation reporting method and a fall in crude oil prices in November and December. This result came as a surprise, and, as a result, it is likely that dividend yield will be lower than expected.

In 2018, NIS recorded revenue growth of 19.7% to RSD 281.0bn, primarily due to a rise in the crude oil price on average by 31%, as well as the growth of natural sales (+7.4%). EBITDA rose 14.4% to RSD 53.7bn, with EBITDA margin drop of 90 basis points to 19.1%. Net profit declined 6.8% to RSD 25.1bn, due to the fall in crude oil prices in November and December and the switch to a new depreciation method.

¤ Profitability - Following RSD 26bn net profit in the first ten months, NIS surprisingly announced the bottom line for FY2018 at just RSD 25.1bn. The upstream segment contributed to a net profit with RSD 27bn (+32%), while the downstream showed loss of RSD 1.9bn (in 2017, this segment was driven by positive FX differences).

¤ Dividend - The company is likely to retain a payout ratio of 25%, while the expected dividend amounts around gross RSD 40 per share (5.5% yield).

¤ CAPEX - NIS invested RSD 41bn (+55%) in 2018, and around 35% of funds were directed to the deep processing project. This key project for the company should start in September this year.

¤ Expectations - NIS should increase profitability this year due to the launch of a deep processing project (which should contribute to EBITDA this year with RSD 2-3bn), and the company should also benefit from last year's market share growth (total market share increased by 2 pp to 76,4%). However, the bottom line will largely be determined by the price of crude oil that has risen 22.2% since the beginning of the year (Brent average price in the period 62.7 USD/bbl).

¤ Valuation - Despite the published net result below the market forecast and lower than expected dividend yield, NIS's shares recovered and are traded above RSD 700 level for the first time since June last year. Generally positive performance of the company last year despite the decline in net profit (natural refining and sales volume at a record level, EBITDA highest since 2014), but also the fact that the shares are generally underestimated (NIS is traded below the half of its book value, on the expected PE ratio of 4.3x and dividend yield of 5.5%) contributed to this outcome. The recovery of the stock, which oscillated slightly around the level of RSD 700 for more than a year and a half, could be the result of a more favorable situation on the capital market following the expected payment of the Belgrade Airport concession fee to minority shareholders (gross amount around EUR 65m). However, the effects of this spillover will certainly be limited given the broad diversification of the minorities (at least two million minority shareholders), but also on the generally illiquid domestic market.