• The unprecedented lockdown measures implemented by the government are taking its toll on oil demand for road transportation and aviation sector. We expect Petdag’s sales volume to decline by c.20% yoy in FY20F before gradually recovering FY21F onwards.

• We cut our FY20-22F earnings estimates by 20-61% to reflect lower sales volume and the expected inventory lag loss due to sharp decline in oil price. Subsequently, we also expect lower dividend in view of weaker earnings ahead.

• Downgrade to TRADING SELL (from BUY) with lower DCFderived TP of RM18.20 (from RM26.00), which implies 52x FY20F P/E before easing to 25x FY21F P/E. We believe this is fair given its earnings risk from lower sales volume and dividend yield.

Lower sales volume ahead

The unprecedented lockdown measures imposed by the government had significantly reduced the demand for road transportation and jet fuel. According to Department of Stats. (DOSM) survey, household spending for transportation dropped by 80% during Movement Controlled Order (MCO). Meanwhile, airlines worldwide grounded more than 50% of the plane capacity. We expect severe decline in Petdag’s sales volume in 1H20 as these segments accounted more than 50% of Petdag’s total sales volume (Chart 1). Overall, we expect total sales volume to decline by c.20% yoy in FY20 to 12.5bn litres (FY19: 15.6bn litres) before recovering in FY21F onwards.

Significant inventory lag loss in 1Q20

PetDag could be facing significant inventory lag loss in 1Q20 due to sharp decline in oil price. Benchmark Brent crude oil price dropped by a massive 66% to $25/bbl from $65/bbl. Historically, PetDag posted weak quarterly profit when oil price plunged, as observed in 4Q14 and 4Q18 (Chart 4). Similarly, we expect a weak result in 1Q20, if not turning into losses.

Cut earnings forecast; expect lower dividend

We cut our FY20F/FY21F/FY22F earnings forecast by 61%/23%/20% (Table 1) as we imputed the expected inventory losses and lower sales volume moving forward. Subsequently, we expect significantly lower DPS of 35 sen in FY20 (FY19 DPS: 85 sen) based on 100% payout (Chart 3), implying dividend yield of 1.6%.

Downgrade to TRADING SELL; TP RM18.20

We downgrade the stock to TRADING SELL (from BUY) with a lower DCF-derived TP of RM18.20 (from RM26.00), implying 52x FY20F P/E before easing to 25x FY21F P/E (Table 2). We believe this is fair given its earnings risk from lower sales volume and dividend yield.

Source: BIMB Securities Research - 15 Apr 2020