MOL 4Q05 net profit came in 2.6% ahead of consensus
MOL reported a 4Q05 net profit at HUF 54.8bn, 4.2% above Bloomberg consensus of HUF 52.6bn, but only 2.6% above portfolio.hu’s much wider consensus of HUF 53.4bn. Operating profit however, comes as a slight negative surprise to us as both upstream and downstream delivered weaker-than-expected figures. Overall, we see neutral market reaction to the report.
Upstream. MOL's upstream EBIT came in at HUF 31.5bn for 4Q05, down 4.1% q/q but up 202% y/y, and is 5.9% lower then our expectation. Even though quarterly crude oil production was stronger then anticipated (594kt vs 571kt), the increased royalty related to the domestic production and higher then expected Russian tax payments lowered the overall results.
Downstream. MOL reported downstream EBIT of HUF 40.4bn, down 8.3% y/y and 6% below our estimate. EBIT decreased 20% q/q, despite refined volumes remaining strong (we saw a minor 1.8% q/q contraction only). Brent-Ural price differential squeezed to USD 2.8/bbl in 4Q05 from USD 4.25/bbl in 3Q05, such as the crack spreads of main products (with the only exception of gasoline). While its wholesale market share remained broadly unchanged, MOL reported a significant fall in its retail market share in both Hungary (down to 40.6% in 2005 from 43% in 2004) and Slovakia (down to 41.6% in 2005 from 44.5% in 2004), due to the increasing turnover of discount (mainly hypermarket) networks.
Natural gas segment, as expected, delivered a loss on the operating level. Quarterly LBIT (Loss Before Interest and Tax) of 2.1bn was 12% more than expected. THE Spread between import price and average selling price fell sharply from HUF 7 per cubic meter in 3Q05 to HUF -2.3 per cubic meter in 4Q05 thus resulting in the first quarterly loss in the segment since 2Q03. Based on this trend (fast growing import prices but no change in retail gas prices) we see gas division losses to widen substantially in 1Q06. Note that based on the agreement between MOL and E.On, the Hungarian company is not fully independent from the result of the loss-making WMT unit even after the closing of the deal.
Petchem EBIT showed a sharp rebound from 3Q05, when it was close to breakeven. In 4Q05, the segment contributed HUF 5.6bn to the EBIT of MOL, only marginally below our expectation. Due to the increase in polymer prices, integrated petchem margin reached EUR 435 per ton in 4Q05 – in line with our forecast – up from EUR 330 in 3Q05.
Corporate costs came in at HUF 7.2bn, 26% below our forecast, partly due to an unexpected 6.1% q/q decrease in total group headcount. The other reason why we have overestimated this line is that MOL’s efficiency improvement program resulted in more savings than expected. By the end of 2005 MOL reached USD 305m savings in general costs, versus its USD 260m target. We welcome the strict control of costs and consider this as one of the major positive developments in the report.
Tax payment of HUF 4.5bn was 6.7% lower than expected mainly due to lower pretax profit. Effective tax rate of 7.5% was only marginally higher than our estimated 7.3%. Fortunately for MOL, those business lines presented higher results (downstream and petrochemicals), where the company enjoys tax holidays (the parent company and TVK enjoys a full tax holiday in Hungary, however, Slofnaft do not). In the meantime natural gas-related subsidiaries subject to no tax allowances delivered negative EBIT which somewhat lowered corporate tax payment of the group.
Financials came almost fully in line with our forecast. As expected, MOL suffered some HUF 8bn loss on the revaluation of its foreign currency debt due to the weakening forint in 4Q but gains on trade payables partly compensated for this. MOL’s quarterly financial result of 8.9bn came in 1.9% higher than our forecast.
We expect neutral market reaction to the result as EBIT was slightly lower than expected, while net profit exceeded forecasts also slightly. We were not aware of any major speculation ahead of the results, thus we do not expect any major movements of investors to close positions. As refining margin dropped significantly in late January, the market has significant concerns over the refining margin environment in 2006. Although we are positive on this, having numerous arguments why refining margin environment should remain robust this year, until the first signs of a margin upturn, the market is likely to remain cautious on MOL. We maintain our Hold recommendation on the stock with a price target of HUF 22,650.