We met with PetDag to discuss the company’s business model, strategic focus and growth plans. We came away feeling pessimistic about the group’s near term earnings prospects given Covid-19/MCO headwinds. Overall, we expect FY20 core PATAMI to decline by -41.6% mainly from lower retail and commercial sales. We lower our FY20/21/22 forecasts by 8.2%/1.9%/4.0% to account for lower-than-expected sales going forward. Overall, we expect FY20 core PATAMI to decline by -41.6% mainly from lower retail and commercial sales. We maintain our SELL call. After adjusting for our earnings changes, our TP falls to RM15.10 from RM15.80 based on an unchanged PE multiple of 24x.

We met with PetDag to discuss the company’s business model, strategic focus and growth plans. We came away feeling pessimistic about the group’s near term earnings prospects given headwinds from Covid-19/MCO.

Business model overview. PetDag is the sales and marketing subsidiary of Petronas whose principal activities involves the marketing and distribution of petroleum products to either individual consumers via their nationwide petrol station network (under their retail division) or businesses (under the commercial division). As these two divisions account for the bulk of PetDag’s sales (cumulatively ~94% of PetDag’s sales in FY19), we examine the impact of Covid-19 on these two business divisions.

Retail division outlook. MCO restrictions in 2Q20 and companies continuing to persist with work-from-home arrangements is expected to translate to lesser sales volumes as consumers reduce their on-road travel. While we reckon the MCO has sped up growth in e-commerce activity and hence home delivery services, we reckon it will be insufficient to compensate for consumers travelling less. We expect retail sales to decline by ~25% in FY20 driven by (i) fuel sales volume decline of 19% (Figure #8); (ii) lower ASPs; and (iii) lesser non-fuel revenues.

Commercial division outlook. We expect most of PetDag’s commercial division’s operations to be affected by MCO restrictions. In particular, we expect airlines to be the most impacted, with PetDag’s jet fuel sales volumes expected to decline by 30- 35% in FY20. In addition to jet fuel, we also expect significantly lower sales volumes of diesel (used in upstream production of crude oil, transportation etc.), sulphur (used in the production of chemicals), and bitumen (used to build roads). Overall, we expect commercial sales to decline by ~35% in FY20 from (i) sales volume decline of 21%; and (ii) lower ASPs.

Forecasts. We lower our FY20/21/22 forecasts by 8.2%/1.9%/4.0% to account for lower sales numbers going forward. Overall, we expect FY20 core PATAMI to decline by -41.6% mainly from lower retail and commercial sales.

Maintain SELL, TP: RM15.10. We maintain our SELL call. After adjusting for our earnings changes, our TP falls to RM15.10 from RM15.80 based on an unchanged PE multiple of 24x (-1SD of 5 year average PE of 28.5) pegged to mid-FY21 earnings. We reckon a PE multiple of -1SD below its five year average is justified given (i) the cloudy earnings outlook, particularly from jet fuel sales; and (ii) expected decline in core PATAMI of 41.6%.

Source: Hong Leong Investment Bank Research - 17 Aug 2020