PetDag reported a 2Q22 core PATAMI of RM155.4m (+23% QoQ, +91% YoY), bringing 1H22 core net profit to RM281.8m (+6% YoY). We deem the results to be below our expectations but in line with consensus, accounting for 41%/47% of our/consensus full-year forecasts respectively. We think that PetDag will continue to be the beneficiary of the reopening theme and economic recovery post-Covid with the gradual ease of restrictions. However, we view that at current levels, the group’s share price have gone past its fundamentals and we believe that the risk-to-reward ratio is not justified at forward multiples of about 35x. We downgrade PetDag to SELL (from BUY previously), with a lower TP of RM15.89/share – pegged to 25x P/E on FY23f EPS, which is at parity to its 3-year average mean valuations.

Missed our expectations but in line with consensus. PetDag reported 2Q22 core PATAMI of RM155.4m (+23% QoQ, +91% YoY), bringing 1H22 core net profit to RM281.8m (+6% YoY), predominantly adjusted for: (i) RM14.9m impairment loss on receivables; (ii) RM1.7m PPE expensed off; (iii) RM2.2m write back of impairment of receivables; (iv) RM1.3m net gain on disposal of PPE; and (v) RM87.9m gain on disposal of LPG business. We deem the results to be below our expectations but in line with consensus, accounting for 41%/47% of our/consensus full-year forecasts respectively. Key variance against our forecast was due to lower-than-expected profit margins led by higher opex in 2Q22.

Dividend. Second interim dividend of 11 sen/share was declared (ex-date: 8 Sep) in 2Q22. YTD 1H22 total dividends stood at 16 sen/share.

QoQ. Revenue and core net profit was up by 25% and 23% respectively QoQ mainly due to: (i) higher ASP (+14%); and (ii) higher sales volume (+9%), following higher and favourable prices movement throughout the quarter.

YoY. Revenue and core net profit was up substantially by 85% and 91% respectively YoY mainly due to: (i) higher ASP (+34%); and (ii) higher sales volume (+36%), following higher and favourable prices movement throughout the quarter.

YTD. 1H22 revenue and core net profit was up by 67% and 6% respectively YoY mainly due to: (i) higher ASP (+30%); and (ii) higher sales volume (+28%), following higher and favourable prices movement throughout the quarter. We note that profit margins were squeezed in 1H22 due higher opex due to higher dealer’s commission.

Outlook. We think that PetDag will continue to be the beneficiary of the reopening theme and economic recovery post-Covid with ease of restrictions. However, we view that at current levels, the group’s share price have gone past its fundamentals and we believe that the risk-to-reward ratio is not justified at forward multiples of about 35x.

Forecast. We trim our FY22-24f earnings forecast by -14%, -23% and -22% respectively to account for lower profit margin assumptions.

Downgrade to SELL, lower TP of RM15.89. Since our contrarian upgrade on Petronas Dagangan on 29 Nov 2021, the group’s share price has increased by a decent 10%. Coupled with the disappointment in the group’s recent quarter and our view that investors have already priced in the economic recovery prospects post - Covid, we downgrade PetDag to SELL (from Buy previously), with a lower TP of RM15.89/share – pegged to 25x P/E on FY23f EPS, which is at parity to its 3-year average mean valuations.

Source: Hong Leong Investment Bank Research - 25 Aug 2022