Brighter outlook for Chevron Lubricants PLC depends on relaxation of fuel quota

Chevron Lubricants PLC’s (LLUB) net profit for 1Q2023 inclined by 23.6%YoY to LKR 1.2Bn largely due to the poor performance during the last comparative quarter, which was affected by forex loss of LKR 1.6Bn incurred on USD denominated trade payables, First Capital Research says.

It further says: “LLUB earnings also grew by 170.3% QoQ aided by strong topline performance which grew at 33.9% QoQ possibly due to increase in volumes as company revised down prices by 15-30% in line with the easing inflation.”

“Moreover, as we predicted in our previous reports GoSL increased the fuel quota system from 4th April 2023. We continue to maintain our stance that the fuel quota system will be completely relaxed aided by strengthening reserves, depressed global crude oil prices and appreciating LKR/USD.”

“Relaxation of fuel quota remains a key catalyst for volume growth in the near term, whilst recovering tourism sector as well as recovering business confidence and possible relaxation of import ban on vehicle imports are expected to drive lubricant volumes in the near term.”

“Hence considering the bright outlook of the company, we forecast a net profit of LKR 3.8Bn for 2023E and LKR 4.9Bn for 2024E.”

“Given that LLUB trades at a discount of 96.1% to the historical 5-yr average PE of 10.0x, we believe the share is deeply undervalued at current multiples. Hence, taking into consideration the future outlook together with attractive dividend yield and trading multiples, we have arrived at a target price of LKR 150.0 for 2023E and LKR 170.0 for 2024E. Thus, we maintain our recommendation BUY,” First Capital says.