Hengyuan Refining Company Bhd is positioned to deliver a net profit of approximately RM1.8 billion for the financial year ending December 31, 2026, according to a recent analysis by BIMB Research. The research firm highlighted that this conservative estimate factors in minimal inventory gains and reduced margins in the second half of the year, leaving room for potential upside surprises.
The projected profit would value Hengyuan at about 1.2 times its price-to-earnings ratio for FY26, indicating a significant discount relative to the company's earnings potential. BIMB Research attributed the expected earnings growth primarily to elevated crack spreads for refined petroleum products rather than solely to higher crude oil prices. The elevated crack spreads—differences between the price of crude oil and its refined products—remain a key driver of Hengyuan’s financial performance amid ongoing global market uncertainties, including the prolonged conflict in Iran.
Hengyuan has historically faced challenges related to high financial leverage, which have constrained profitability in prior years. However, the analysis forecasts positive cash flow accumulation of around RM1.8 billion over FY26 and FY27. This improvement is expected despite working capital demands that require upfront payments for feedstock purchases. The research anticipates finance costs will decline sharply from approximately RM176 million annually to below RM40 million by FY27/FY28, largely due to deleveraging efforts, which should support sustained profitability once market conditions stabilize.
The cyclical nature of the commodities market underpins BIMB Research’s view that Hengyuan’s stock is likely to benefit from a strong earnings trajectory over at least the next six months. Based on earnings projected through mid-2027 and a target price-to-earnings ratio of three times, the firm values the stock at RM4.70 per share. This calculation includes an assumed 33% dividend payout ratio, equating to around RM1 per share and representing a total potential shareholder return of 41% from current levels.
Hengyuan’s reported net profit of RM1.1 billion for the first half of 2026 further supports these expectations, reflecting a valuation of less than one time the FY26 price-earnings ratio when annualized. The company also raised RM232.5 million through a capital placement in 2025 to reduce leverage. Finance costs have already declined substantially, from an annualized RM176 million in the fourth quarter of 2025 to just RM20 million per quarter as of the second quarter of 2026.
Additionally, Hengyuan benefited from zero tax on earnings during the first half of 2026, thanks to tax reserves accumulated from previous losses. However, BIMB Research projects the tax rate to normalize in FY27, which has been factored into the profit outlook.
As of the latest trading session, Hengyuan’s share price stood at RM3.53.