Hengyuan reported reduced profit: why?

Koon Yew Yin 2 June 2022

Many weak shareholders and less informed investors rushed to sell their holdings when they saw Hengyuan reported reduced profit of 15.82 sen EPS for its 1st quarter ending March. Its previous quarter ending December 2021 EPS was 59.9 sen.

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What is the advantage and disadvantage of forward sale?

From my experience as founder of IJM Corporation we   always sell forward our products such as houses, offices etc. As construction contractor, when we have a construction contract which is similar to forward sale, the contracted price is fixed but the prices of construction materials may vary. If the material price goes up, we earn less profit. But if the material price comes down, we can make more profit. 

In the case of Hengyuan, the company sold forward its refined products during the 1st quarter ending March. Like most people, the company did not expect Russia to invade Ukraine during the 1st quarter, on 24 February. As a result, crude oil price started to shoot up higher and higher because the NATO nations including US imposed trade sanctions on Russia and they try to stop buying oil from Russia. Russia is the 3rd biggest oil producer in the world.

When crude oil price is shooting up higher and higher as shown on the WTI crude oil price chart below, oil producers can easily increase production by pumping more oil. But oil refineries like Hengyuan and Petron cannot simply increase the speed of refining more crude oil. In Malaysia Hengyuan and Petron are the only 2 listed refineries.      

Hengyuan’s profit solely depends on Brent Crack Spread margin which started to shoot up from 10 to currently 29.574 as shown on the chart below. 

Hengyuan reported 15.82 EPS with forward sale losses, when the average Brent Crack Spread was about 10. The average Brent Crack Spread for the next quarter ending June should be about 20. Even if Hengyuan have forward sale of its refined products, its profit for the next quarter ending June should be much better.   

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