Retail Fuel Shift And Refining Efficiencies Will Support Stronger Long Term Earnings Power

Catalysts

About Petron

Petron Corporation operates integrated refining and fuel marketing businesses in the Philippines and Malaysia, supplying petroleum products across retail, commercial, and industrial channels.

What are the underlying business or industry changes driving this perspective?

• Continued migration of fuel demand into formal and branded retail networks in the Philippines and Malaysia is allowing Petron to grow higher margin retail volumes faster than total industry demand. This is supporting sustained revenue growth and improving operating margins.
• Structural efficiency gains from recent refinery and plant upgrades, together with disciplined cost control, mean that even in a flat crude price environment Petron can keep widening crack spreads and converting a greater share of sales into earnings and free cash flow.
• Ongoing economic and infrastructure development in the Philippines, including rising vehicle ownership and logistics activity, is expected to underpin steady growth in domestic fuel consumption. Petron already holds a leading market share in this area, which reinforces top line resilience and operating leverage.
• Gradual normalization of inventory losses as crude prices stabilize at the lower band highlighted by management should reduce earnings volatility. This would allow core profitability trends from volumes and margins to be more visible and better reflected in valuation multiples.
• Improved industry discipline and more rational competition, combined with Petron’s scale and integrated supply chain, position the company to capture a disproportionate share of demand growth in profitable segments. This is driving structural enhancement in net margins and earnings power.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Petron's revenue will grow by 18.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.5% today to 2.5% in 3 years time.
• Analysts expect earnings to reach ₱33.8 billion (and earnings per share of ₱0.98) by about December 2028, up from ₱4.2 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 1.5x on those 2028 earnings, down from 4.9x today. This future PE is lower than the current PE for the PH Oil and Gas industry at 8.8x.
• Analysts expect the number of shares outstanding to decline by 4.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.83%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Structural pressure on fuel demand from the global energy transition, rising electric vehicle adoption and accelerating renewable capacity in the Philippines could cap or reduce long term refined product consumption. This could limit Petron's ability to grow retail volumes and put downward pressure on revenue growth and operating leverage, which would weigh on earnings.
• Persistent oversupply in crude markets and OPEC plus production increases could keep Dubai crude prices range bound at lower levels for an extended period. This would increase the risk of recurring inventory losses similar to the PHP 2 billion loss year to date 2025 and make reported margins and net income more volatile and potentially weaker than forecast.
• Greater policy focus on sustainability, potential carbon pricing and stricter environmental regulations across the San Miguel group could require additional capex at Petron for emissions control and efficiency. This could raise operating and financing costs and compress net margins and free cash flow, which would constrain earnings growth.
• Macroeconomic headwinds in the Philippines such as slower GDP growth, weaker domestic demand and political or governance concerns around infrastructure spending could dampen transport activity and fuel consumption. This could reduce Petron's volume growth in its key domestic market and limit improvements in revenue and operating income.
• Intensifying competition from alternative fuels and more aggressive pricing or capacity additions by regional refiners could erode Petron's crack spreads and its ability to sustain higher margin retail sales growth. This could lead to margin compression and weaker net income and returns than implied by the bullish share price view.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₱3.85 for Petron based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₱1324.5 billion, earnings will come to ₱33.8 billion, and it would be trading on a PE ratio of 1.5x, assuming you use a discount rate of 19.8%.
  
• Given the current share price of ₱2.33, the analyst price target of ₱3.85 is 39.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.