We attended PetDag’s 2Q20 results briefing and came away feeling slightly pessimistic on their near term prospects going forward, but reckon that the worst is over. We lower our FY20/21/22 earnings forecasts by 12.8%/1.5%/1.4% to account for weak sales volumes and ASPs in 1H20 as well as weak sales of Jet A1 fuel for the foreseeable future. Still, we expect better 2H20 earnings vs. 1H20 due to higher volumes and ASPs. With the worst possibly behind them, we rejig our PE target from 24x to 26x (-0.5SD below 5-year mean) and roll over to FY21 (from mid-FY21). All in all, TP rises from RM15.10 to RM19.84. Upgrade to HOLD.

We attended PetDag’s 2Q20 results briefing and came away feeling slightly pessimistic on their near term prospects going forward, but reckon that the worst is over.

Month-on-month profitability. We note that PetDag’s profitability was at its lowest in April during the height of MCO restrictions, before recovering in May and June. PetDag shared it monthly sales (Apr: RM623.7m, May: RM928.3m, Jun: RM1,379.8m) and PBT figures (Apr: -RM119.5m losses, May: RM13.4m, June: RM107.3m). Based on this, we reckon the worst is behind them.

Sales volume outlook. While in the commercial division, closure of non-essential manufacturing and construction businesses have impacted commercial diesel 2Q20. With gradual recovery of these businesses expected, we expect better commercial sales volumes in 2H20. However, we note that demand for Jet A1 fuel continues to be subdued due to restricted global travel rules.

Higher ASPs going forward expected. PetDag shared overall ASPs in 1H20 were down by approximately -17% vs. SPLY. While Brent crude average price of USD29.20/bbl in 2Q20 is expected to recover, we expect PetDag ASPs to rise as planned OPEC supply cuts come into effect. Note that Brent crude price is currently at USD42/bbl.

Operating expenses. We note that PetDag’s 1H20 reported operational expenses of RM1,080.3m was 10.5% lower vs. SPLY. PetDag guided that this was due to cutting back on advertising and promotional spending.

Forecast. We lower our FY20/21/22 earnings forecasts by 12.8%/1.5%/1.4% to account for weak sales volumes and ASPs in 1H20 as well as weak sales of Jet A1 fuel for the foreseeable future.

Upgrade to HOLD, TP: RM19.84. Despite the earnings cut, we still expect better 2H20 earnings vs. 1H20 from higher volumes and ASPs due to reasons mentioned above. With the worst likely behind them, tweaked our PE target higher from 24x to 26x (-0.5SD below 5-year mean) and rolled over our valuation horizon from mid-FY21 to FY21 EPS. All in all, our TP rises from RM15.10 to RM19.84. Upgrade to HOLD.

Source: Hong Leong Investment Bank Research - 27 Aug 2020