• 2Q18 core profit rebounded strongly, up 26% yoy and 35% qoq to RM283m after a weak 1Q18 results, mainly on higher inventory lag gain.

• Overall, 1H18 core earnings grew 5.5% and were within ours and consensus forecast at 46% and 49% respectively.

• We estimate sales volume declined 2% at 3,580 mil litres as both retail and commercial volume declined by 1%.

• We retain our BUY recommendation on PDB with unchanged TP of RM30.00. We believe 2H18 could see stronger sales volume amidst the jump in new car sales and recovery in offshore activities.

Boosted by inventory lag gain

Excluding insurance proceeds claim estimated c.RM39m, PDB’s 2Q18 core earnings grew RM58m or 26% yoy to RM283m. This was mainly on higher inventory lag gain following the rapid rise in Mean of Platts Singapore (MOPS) product prices. The company netted inventory gain of RM90m in the quarter which partially offset by higher advertising expenses primarily in retail segment. Overall, 1H18 earnings rose 5.5% yoy and were within ours and consensus estimates.

Lower product costs expanded retail margin

Retail operating profit grew strongly by 56% yoy and 43% qoq to RM238m mainly on inventory lag gain which more than offset higher advertising costs and lower sales volume of 1%. This saw operating margin expading to 6.2% (2Q17: 4.2%, 1Q18: 4.4%). On qoq basis, retail sales volume grew 3% amidst fixed subsidised pump price and holiday for election.

Slow down in commercial sales volume

The commercial segment recorded lower sales volume of 1% yoy. This was due to lower jet fuel sales volume which more than offset higher sales volume from Diesel, bulk LPG and Sulphur. Notwithstanding, ASP jumped 18% resulting in higher operating profits by 3%.

Declared higher second interim dividend of 16 sen

PDB declared its second interim DPS of 16 sen which implies payout ratio of 51%. This was higher than 2QFY17 DPS of 14 sen which brings YTD DPS of 19 sen (1H17: 18 sen)

Retain BUY with unchanged TP RM30.00

We retain our BUY call on PDB with an unchanged DCF-derived TP of RM30.00. This is based on a 7.5% WACC and long term terminal growth rate of 1.5% which implies 26.3x FY19E PE. We believe PDB can capture higher sales volume in 2H18 supported by jump in new car sales and recovery in offshore activities.

Source: BIMB Securities Research - 21 Aug 2018