Hungry for energy

Energy seems to be the buzzword in this high oil price era. Every few months we hear some big news regarding the energy sector. Just last month, we hear the discover of biggest oil field in Brazil.

Last week, one of the big news is Finnish refiner Neste Oil would spend 550 million euros ($814 million) to build the world's largest biodiesel plant in Singapore to meet growing demand for biofuels. Neste said the plant would have a design capacity of about 20,000 barrels per day, and use mostly palm oil as its raw material, though it can use also soy oil or animal fats.

This is a major win for Singapore as it gear up to become the regional petro chemical centre. I guess the Singapore economy with multiple of growth engine should keep doing well in the coming years.

The bio fuel plants which new/existing players are building up is not without risk. The continuous increase of the oil price prompts player to look for alternative energy like bio fuel. However, keep in mind that, CPO also increase along with the oil price. Because people expect that bio fuel which need the palm oil as feed stock would increase its demand. So, at the end, I doubt the bio fuel can be significant cheaper than oil. Worst case is we have the oil price collapse and CPO keep remaining at high level. That would be a big trouble for these bio fuel players. The situation remain unclear on the bio fuel industry, and punters who bet on it would have to be careful.

Today in CIMB report, China Energy has announced the expansion of its methanol production capacity by three-fold to 750,000 tonnes p.a. Forecasts raised; higher target price of S$2.12 from S$1.73. Our FY07 EPS forecast has been lifted by 6% to factor in higher DME ASPs. Our FY08-09 EPS estimates have been raised by 62-63% on higher gross margin assumptions (+12-18% pts), which more than offset delays in DME expansion. Accordingly, our
target price climbs to S$2.12 from S$1.73, still based on a 30% discount to our new DCF valuation (WACC 13%, LTG 2%) of S$3.03 (previously S$2.48). At our new target, China Energy is valued at 7.5x CY09 earnings, which we believe is undemanding against a 3-year EPS CAGR of 79% for FY07-09.

I was almost sucked into buying China Energy while it was around 1.8 level. Lucky enough, sometime I made good decision, sometime I made bad decision, I didn't purchase it. Since the disappointing result, share price has corrected a lot. Looking at the forecast growth, it is indeed impressive. The risk with company is the aggressive expansion, as they aimed to be the largest DME player in China. If you buy, you are buying for the future. Don't expect it would suddenly go up in the near term. History has told us, some of the greatest story does not turn out well. Monitor the risk and set a cut loss point, if thing turns out otherwise. Beside that, of course, study the company really well and make sure you understand their growth driver and risk.