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Petroleum Industry of Serbia (NIIS)

Petroleum Industry of Serbia (NIIS)

The Petroleum Industry of Serbia (NIIS) recorded a strong recovery in 2017, primarily as a result of a sharp rise in crude oil prices on the global market. Improved business trend was not followed with the movement in the price of shares that failed to continue the upward trend from 2016.

In the past year, NIS recorded 22.2% revenue growth to RSD 234.7bn, primarily due to the crude oil price jump of 27%. EBITDA reached RSD 47bn (+18.1%), with a slight margin decline to 20%. Expectedly, the largest contributor to the EBITDA indicator was research and production (upstream) of nearly RSD 30bn (+34%), while EBITDA in the processing and marketing (downstream) weakened 2.4% to RSD 17bn. Net profit of the company jumped 79.6% to RSD 27bn, with a large contribution of FX gains of almost RSD 7bn. Operating cash flow (OCF) amounted to RSD 59bn (+43%).

¤ Operating indicators - The production of oil and gas continued the downward trend (-5%), despite the increase in reserves of 3.1%. In addition, for the current year, production is planned to decline, though with a lower intensity. Refining jumped by 9%, while sales was up by 5%, primarily due to sales growth of foreign assets (+32%). Domestic wholesale, which accounts for more than half of the volume, has increased by 2%.

¤ CAPEX, Bottom of the Barrel project - NIS will invest RSD 47bn this year (RSD 26.5bn in 2017), which is the largest level of investments since 2013. Most of these investments will relate to the project of deep refining (the total value of this investment is USD 330m), whose commissioning is scheduled for 3Q 2019. With this project, the refining depth will increase from the current 85.5% to 99.2%, while the share of light petroleum products will increase from 74.1% to 84.6%. This project will contribute to the EBITDA indicator with RSD 10bn per year.

¤ Valuation - NIS is currently traded at half the book value, while the expected P/E ratio is below 4x, with a dividend yield of almost 6% (the company will retain a 25% payout ratio despite increased investments). The main negative factor in the growth of this stock seems to be the structure of investors in the domestic market, and especially the absence of professional investors. Although the current market capitalization of NIS is relatively small, almost at EUR 1bn, free float of around EUR 140m is too big for investors, as average daily turnover in the first two months amounted to only EUR 170k.