Sudden profitability drop
According to the financial statement of Q4/2018, BSR revenue was VND 29,238bn. However, the cost of goods sold surged to VND 30,069bn, creating a loss in gross profit of VND 831bn. After including other costs like selling expenses, administrative expenses, and interest expenses, the total loss was VND 1,010bn. In Q4/2017 BSR posted a profit of VND 1,200bn.
For the full year of 2018, BSR achieved VND 112,635bn in revenue (+43.7% YoY) and VND 3,557bn in profit. However, 2018 profit was far below the profit of 2017, which was VND 7,673bn.
The fluctuation of oil price was the main cause for the loss in Q4/2018. The oil price had fallen from USD 86.16/barrel on 4 October to USD 50.21/barrel on 28 December, a fall of 42%. This drop in oil price consequently caused a drop in selling price of BSR.
The business nature of BSR requires the company to maintain a certain level of inventory and have a certain period of time to produce the final petroleum product. Hence, when the oil price drops, the cost price is usually higher than the market price.
This was also the reason for the negative result of BSR in the first half of 2019. According to the financial statement of Q2/2019, BSR revenue and profit were at VND 27,845bn (-5% YoY) and VND 300bn (-86% YoY), respectively. The accumulated revenue and profit in the first six months of 2019 were VND 50,915bn and VND 900bn, completing 50% of full year target of revenue and 30% of full year target of profit, respectively.
Nightmare for investors
BSR was first listed on UPCOM in March 2018 with a reference price of VND 22,400/share. At that time, BSR was considered a hot stock of UPCOM with the 2017 profit of VND 7,673bn which was even the dream profit number of many companies on HOSE. That was why a huge amount of 14mn shares changed hands on the first trading day with total trading value of VND 431bn and an average trading price of VND 30,638/share.
However, the bad operating results caused the stock price to fall continuously since Q4/2018. The stock even fell to VND 10,000/share on 24 July 2019. Compared to reference price, BSR share price fell 55%. However, if we compare the peak of VND 31,300/share, the stock price has dropped 75%. This is a nightmare for investors who are holding BSR shares, which include some institutional investors who are considered wolves in the Vietnam stock market.
For example, VEIL, a fund which is managed by Dragon Capital, has invested USD 10.5mn in BSR at the beginning of 2018 when the company did the IPO. Note that, BSR was successful in selling 241mn shares at the IPO, equivalent to 7.79% to investors at the average price of VND 23,043/share. At the end of 2018, the investment value of VEIL in BSR fell 36%.
Difficulties expected to stay
At the 2019 Annual General Meeting (AGM), the main topic which was discussed was the negative operating result. According to the company management, there were many reasons for this result.
Firstly, after listing on the stock exchange, the high volatility of oil price in the global market created challenges and difficulties for BSR. Secondly, the narrow gap between oil price and the price of refinery product also negatively impacted the operating result of the company. Thirdly, the decline in production of Bach Ho Oil Field, the tax imposed on oil materials of the government, and the competition by Nghi Son Refinery Plant were also the reasons for the negative operating result of BSR.
The AGM also approved the plan of 2019. The revenue and profit targets are set at VND 97,979bn and VND 2,939bn, respectively. It is not easy to meet these targets although the management has tried to cut costs given the high volatility of oil price in the global market.
According to the forecast of International Energy Agency (IEA), in 2019, the global oil supply will increase by about 2.6mn barrels/day, while the global oil demand will only increase by 1mn barrels/day. 2019 is expected to be a tough year for refinery companies given the fall in expected profits as compared with an increase in production capacity.
BSR is operating at full capacity, hence the growth in revenue and profit of the company is mainly dependent on the increase in selling price and the expansion of profit margin. While the selling price is impacted by the global oil price, the profit margin tends to reduce as the result of supply surplus of refined products.
Furthermore, BF, which is the joint venture between Binh Son Refinery and Tocontap producing ethanol from cassavas, had stopped working since April 2015 when the cost price was higher than the selling price. In October 2018, the plant became operational again. However, company earnings were just enough to cover the staff cost.