• Overview. 2Q19 core earnings fell to RM175m (-38% yoy, -35% qoq) due to inventory loss arising from declining trend of MOPS price and higher depreciation costs.

• Key highlights. Total sales volume grew 8% yoy to an est. 3,900m litres underpinned by encouraging sales volume in retail segment and higher demand for Jet A1 fuel from existing customers.

• Against estimates: Below. 1H19 core profit of RM446m (-12.9% yoy) were behind both ours and consensus’ forecasts at 44%. The shortfall was due to higher-than-expected depreciation charges.

• Dividend. A 2nd interim DPS of 14 sen was declared which implies 81% of payout ratio. This was lower than 2Q18 DPS of 15 sen and brings YTD DPS of 19 sen (1H18:19 sen).

• Outlook. The company raised capex allocation to RM500m from RM300m p.a. to open c.10 new stations in 2019 and refurbish old stations. It expects the high capex cycle to lasts until 2020. We cut FY19-21F earnings by 5.2%-6.3% to account for higher depreciation charges.

• Our call. We upgrade PDB to BUY (from HOLD) with a lower DCFderived TP of RM26.00 (from RM27.25) which implies 26.7x FY19E P/E. We expect a stronger 2H19 as we expect the impact of inventory lag loss to normalize.

Source: BIMB Securities Research - 26 Aug 2019