Update Report SJ Securities Sdn. Bhd.

19 Aug 2011
PP7084/11/2006

Strictly for internal circulation only

Esso Malaysia Bhd

San Miguel Corporation acquiring Esso Malaysia Bhd
Investment Highlights

Sell Fair value RM 3.60 (- 8.87%)

Stock Data Price (RM) Stock code Bloomberg Ticker Listing Share Cap (RM mn) Market Cap (RM mn) Par value (RM) 52-wk high (RM) 52-wk low (RM) Major shareholders: Exxonmobil Investment Management Inc. 3.95 3042 ESSO MK Main 135.0 1066.5 0.50 5.97 2.60

Esso Malaysia Bhd. Incorporated in 1960, it operates in the downstream segment of oil and gas sector. It is engaged in manufacturing and marketing of petroleum products. It owns a network of service stations in Malaysia. 1HFY11 results. 2QFY11 recorded revenue at RM3.06b. It rose year over year 36% and quarter over quarter 18%. Cost of sales has risen 44% yoy and 29% qoq which caused bottom line figures to drop 97%. 2QFY11 net profit registered RM1.8m which is RM69m lower in comparison to 2QFY10 core earnings of RM154.8m. Despite the disappointing 2Q, 6MFY results showed that revenue and net profit have increased 33% and 19% respectively. Gross margin had been affected by higher costs but net profit was able to maintain a 3% margin. Results performance. Higher revenue was driven by stronger demand in 1HFY11 for petroleum products. However the higher revenue was negated by the increasing cost of crude oil feedstock which generally had affected ESSOs overall margins. San Miguel Corporations proposed acquisition. SMC has offered to acquire 175.5m shares which will be satisfied by way of cash RM614.2m (RM3.50 per share). Esso Malaysia currently has a share base of 270m shares. Acquisition of 175.5m shares would represent 65% equity stake in the company. Future plans. 1) San Miguel publicly announced it would upgrade existing facilities for production to include highervalue petroleum products. 2) Expansion into under-served areas Risks. 1) Rise in crude oil feedstock could potentially impact the financial performance. 2) Economic slowdown would have an adverse impact on the companys earnings. Recommendation. Our target price for Esso Malaysia is RM3.60 based on a conservative forward PER of 3.35x and FY12s EPS of 107.4 sen. EMBs share price traded peak high to RM4.95. The last closing price RM4.03 is a 10% premium over our fair value. We feel that the current share price had shot up way overvalued while SMCs offer price is only at RM3.50 per share. Therefore we are putting a sell call on Esso Malaysia.

65.0%

Financial Data Trailing PER (x) BV per share (RM) P/BV (x) ROE (%) Beta (x) Altman Z Score Dividend yield (%)

3.63 3.28 1.20 42.27 1.07 5.39 3.54

Relative Performance (%) 1-month -12.40 3-month -16.08 6-month 30.96 12-month 41.27 YTD 47.34 Our reports are available for download on SJenie website as stated below. SJ Securities Sdn Bhd A Participating Organisation of Bursa Malaysia Securities Bhd www.sjsec.com.my Tel: 603-5634 0202 Fax: 603-5192 8630

SJ SECURITIES SDN BHD

Esso Malaysia Bhd. Incorporated in 1960, it operates in the downstream segment of oil and gas sector. It is engaged in manufacturing and marketing of petroleum products. It owns a network of service stations in Malaysia. 1HFY11 results. 2QFY11 recorded revenue at RM3.06b. It rose year over year 36% and quarter over quarter 18%. Cost of sales has risen 44% yoy and 29% qoq which caused bottom line figures to drop 97%. 2QFY11 net profit registered RM1.8m which is RM69m lower in comparison to 2QFY10 core earnings of RM154.8m. Despite the disappointing 2Q, 6MFY results showed that revenue and net profit have increased 33% and 19% respectively. Gross margin had been affected by higher costs but net profit was able to maintain a 3% margin. Results performance. Higher revenue was driven by stronger demand in 1HFY11 for petroleum products. However the higher revenue was negated by the increasing cost of crude oil feedstock which generally had affected ESSOs overall margins. San Miguel Corporations proposed acquisition. SMC has offered to acquire 175.5m shares which will be satisfied by way of cash RM614.2m (RM3.50 per share). Esso Malaysia currently has a share base of 270m shares. Acquisition of 175.5m shares would represent 65% equity stake in the company. Mandatory Takeover Offer. Acquiring 65% stake in EMB will trigger a mandatory takeover offer for the remaining 35% EMB shares it does not own. San Miguel Corporation. The Philippine-based company is a diversified F&B and packaging company. Over the years, it had expanded its businesses into petroleum, power generation and distribution, mining and infrastructure. It has 68% stake in Petron Corporation which is the largest integrated oil refinery and marketing company in the Philippines. Simultaneous acquisitions. It has also offered to acquire two other companies for a total cash of USD$403.9m for 100% stake in Exxonmobil Malaysia Sdn Bhd and Exxonmobil Borneo Sdn Bhd. SMCs acquisition on all three companies will result an integration of business chain involving refining, distribution and marketing of petroleum products. Acquisition analysis. EMBs main assets consist of 560 service stations, 420 of which are company-owned and an oil refinery in Port Dickson. The Port Dickson refinery has a rated capacity of 88,000 bpd however it was reported that it only produced 56% of the rated capacity just last year. The offer price of RM3.50 is 1.06 times book value and 2.8 times PE (based on FY10s EPS). Future plans. 3) San Miguel publicly announced it plans to upgrade existing facilities such as the Port Dickson refinery so it would be able to product higher-value petroleum products. 4) Expand into under-served areas Risks. 3) Rise in crude oil feedstock could potentially impact the financial performance. 4) Economic slowdown would have an adverse impact on the companys earnings. Recommendation. Our target price for Esso Malaysia is RM3.60 based on a conservative forward PER of 3.35x and FY12s EPS of 107.4 sen. EMBs share price traded peak high to RM4.95. The last closing price RM4.03 is a 10% premium over our fair value. We feel that the current share price had shot up too high and is overvalued as SMCs offer price is only at RM3.50 per share. Therefore we are putting a sell call on Esso Malaysia.

SJ SECURITIES SDN BHD

Name Petronas Dagangan Bhd Shell Refining Bhd Esso Malaysia Bhd Simple avg.

Mkt Cap (RM mn) 15,995 3,144 1,120 6,753

Peers comparison Share price PE PE (RM) CY10 CY11 17.40 11.9 18.2 10.18 30.7 15.5 4.07 2.8 4.7 10.55 15.1 12.8

ROE % CY10 17.27 5.08 42.27 21.54

ROE % CY11 18.00 9.73 48.76 25.50

EPS % CY10 30 (64) 85 17

EPS % CY11 4 41 (97) (17)

Revenue Cost of sales Gross profit Other income Expenses Finance cost Profit before tax Tax Net profit EPS

Results comparison 2QFY10 1QFY11 2QFY11 2,248.7 2,604.8 3,063.1 -2,049.5 -2,300.8 -2,960.3 199.3 304.0 102.9 5.7 5.4 5.2 -101.1 -89.7 -99.8 -5.6 -4.7 -5.8 98.3 215.0 2.5 -27.5 -60.2 0.7 70.8 154.8 1.8 26.2 57.3 0.7

QoQ% 18 29 (66) (4) 11 24 (99) (101) (99)

YoY% 36 44 (48) (8) (1) 4 (97) (103) (97)

Cumulative results Revenue Cost of Sales Gross profit Other income Expenses Finance cost Profit before tax Tax Net profit EPS Margin Gross profit Profit before tax Net profit Unit RM mn RM mn RM mn RM mn RM mn RM mn RM mn RM mn RM mn sen 6MFY10 4255.2 (3870.5) 384.7 11.0 (197.1) (15.6) 182.9 (51.2) 131.7 48.8 6MFY11 5667.9 (5261.1) 406.8 10.7 (189.5) (14.4) 217.6 (60.9) 156.6 58.0 YoY % 33 (236) 6 (2) (4) (7) 19 19 19

RM mn RM mn RM mn

9 4 3

7 4 3

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Revenue Cost of sales Gross profit Other income Operating expenses Administrative and other expenses Finance cost Profit before tax Tax Net profit EPS Dividend Growth Gross profit Profit before tax Net profit Margin Gross profit Profit before tax Net profit

Income statement FY08 FY09 11,735.2 8,032.4 (11,671.7) (7,429.9) 63.5 602.6 23.7 22.9 (317.8) (334.5) (59.7) (67.8) (39.4) (22.2) (329.7) 201.0 79.0 (55.5) (251.3) 145.5 (93.1) 12.0 53.9 12.0

FY10 8,427.4 (7,650.8) 776.6 22.2 (344.6) (65.3) (20.4) 368.5 (99.9) 268.6 99.5 14.0

FY11F 8,848.8 (8,033.4) 815.4 23.0 (349.8) (66.6) (19.4) 402.6 (112.7) 289.9 107.4 12.0

FY12F 9,291.3 (8,435.0) 856.2 23.0 (384.8) (73.3) (18.4) 402.7 (112.8) 289.9 107.4 12.0

(86) (533) (540)

849 161 158

29 83 85

5 9 8

5 0 0

1 3 -2

8 3 2

9 4 3

9 5 3

9 4 3

Balance Sheet FY08 Total Current Assets 577.9 Total Long-Term Assets 1,176.0 Total Assets 1,753.9 Total Current Liabilities 1,302.7 Total Long-Term Liabilities 59.2 Total Liabilities 1,361.9 Total Shareholders' Equity 392.0 Shares Outstanding 270.0 Book Value per Share 1.5 Tangible Book Value per Share 1.4 Shr Eqty/Total Liab & Equity 22.4 Cash Flow Net Income Cash From Operating Activities Cash From Investing Activities Cash from Financing Activities Net Changes in Cash Free Cash Flow Free Cash Flow per Basic Share Cashflow per Share FY08 (251.3) 271.0 (65.9) (207.2) (2.1) 223.3 0.8 1.0

FY09 895.7 1,122.2 2,017.8 1,389.2 115.4 1,504.6 513.2 270.0 1.9 1.9 25.4

FY10 954.6 1,139.1 2,093.7 1,210.8 125.4 1,336.2 757.5 270.0 2.8 2.8 36.2

FY09 145.5 110.3 (9.2) (41.4) 59.7 63.2 0.2 0.4

FY10 268.6 319.2 (77.1) (215.9) 26.2 231.4 0.9 1.2

SJ SECURITIES SDN BHD

Per share data FY09 Book Value/Share 1.90 Cash Flow/Share 0.41 Basic EPS 0.54 Div yield 3.49 Dividends per Share 0.09 Payout ratio 16.70 Price Earnings Ratio (P/E) 4.79 Price/Cashflow 6.31 Price to Book 1.36 EBITDA Margin 3.50 Return on Equity 32 Return on Assets 61 Debt/Capital 8

FY10 2.81 1.18 1.00 3.83 0.11 10.56 2.75 2.32 0.98 4.78 42 45 13

FY11 3.28 (0.51) 0.01

3.81 6.55 1.26 39 43 13

Share performance

Source: Bloomberg

SJ SECURITIES SDN BHD

Disclaimer The information contained in this report is based on data obtained from sources believed to be reliable. However, the accuracy, adequacy, reliability or completeness of the information provided herein is not guaranteed and opinions are subject to change without notice. This report has been prepared for information purposes only and should not be construed as a solicitation for contracts. Any recommendation made does not take into account the specific investment objectives and any particular needs of investors. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors or employees may have an interest in the securities and/or companies mentioned herein.

Stock rating definitions Buy The stock is expected to perform positively. Expected return including both capital appreciation and dividends is expected to exceed 15% over 12 months. Hold The stock is expected to stay sidelined. Expected return including both capital appreciation and dividends is expected to range between negative 5% to positive 15% over 12 months. Sell The stock is expected to perform negatively. Expected return including both capital appreciation and dividends is expected to be negative 5% or lower over 12 months. Not Rated The stock is not under research coverage and the reports serves for purely informational purposes only. Trading Buy The stock is expected to be volatile while providing for near term positive trading opportunities. This is under the high risk category with near term catalysts.