Petronas Dagangan’s (PetDag) 4Q18 earnings missed our and consensus estimates, impacted by inventory losses as a result of the declining MOPS price in November and December 2018, as well as higher refurbishing costs for its petrol stations and advertising and promotion expenses. PetDag declared a 25sen dividend bringing the full-year payout to 70sen (vs. 2017’s 75sen excluding the special dividend). We lower our target price to RM27.20 post the earnings forecast revisions, but reiterate our HOLD call.

4Q18 Results Missed Expectations

PetDag reported a sharp drop in the 4Q18 core profit at RM49m (-83% qoq; -82% yoy) with inventory loss being the main drag following the decline in the MOPS price. Operating costs also increased notably as a result of higher refurbishment costs for petrol stations, and advertising and promotion costs. The earnings achieved 79% of the consensus estimate versus 83% of our estimate. The 2018 revenue was supported by better ASPs in both the retail and commercial segments, which rose 3% and 18% respectively. This was offset by a slight 1% decline in the commercial sales volume, while retail volume was relatively flat at +0.5% yoy.

Impacted by Lower MOPS Price and Higher Operating Costs

4Q18 revenue rose 13% yoy to RM7.9bn on the back of stronger revenue from both the retail and commercial segments. However, the EBITDA margin fell 4.6ppts impacted by the declining MOPS price and higher operating expenses, leading to a decline in core profit to RM49m.

Maintain HOLD

We cut our 2019-2020E earnings by 4% to factor in higher refurbishment expenditure for its petrol stations. As a result, we lower our DCF-based 12- month target price to RM27.20 (WACC: 9.2%, 3% terminal growth) from RM28.30. We maintain our HOLD rating on the lack of catalysts with fuel sales volume continuing to remain under pressure, although PetDag is targeting to grow the non-fuel business to 30% of total revenue from 10% currently.

Key downside risks: i) entry of more ride-hailing companies, ii) an increase in the use of public transport, and iii) more aggressive campaigns and promotions by e-hailing companies. Key upside risk: higher sales volumes.

Source: Affin Hwang Research - 27 Feb 2019