Petronas Dagangan’s (PetDag) headline loss was not a surprise given the crash in MOPS pricing in March 2020, leading to a huge inventory lagged loss. However, the result was a miss as we had previously underestimated the COVID19 impact on the airline industry. We further cut our 2020E earnings by 11% as we factor in weaker jet fuel volume. PetDag declared a lower dividend of 5 sen vs. 15 sen in 1Q19, leading to a cut in our dividend assumption to 47 sen based on an 80% payout. We maintain our Sell rating but roll forward our valuation basis and raise our target price to RM16.90.

Airline Industry to Take a Further Toll

PetDag reported a 1Q20 headline loss of RM29m. After adjusting for RM36m inventories written down, RM6m receivables impairment and RM1.4m forex gain, 1Q20 core profit amounted to RM12m, 96% lower yoy given the impact of the inventory lagged loss following the drastic fall in global oil prices. 1Q20 revenue declined by 8% impacted by lower volume across retail and commercial, falling by 4-5%. Meanwhile, both ASPs also declined by 2-5% due to lower demand following the MCO.

Sales Volume Declined 8% Qoq

Sequential revenue declined 16% on the back of lower average selling prices and with sales volume declining by 8%. Core net profit declined by 91% qoq mainly impacted by the crash in global oil prices towards end March, leading to a decline in MOPS pricing and the huge inventory lagged loss recognised.

Maintain SELL

We cut our 2020 earnings forecast by 11% mainly to factor in a more severe COVID19 impact on the airline industry. All in, we forecast overall 2020E sales volume to decline by 14% yoy with jet fuel volume impacted the most at -20%. We lower our full-year DPS payout to 47 sen (from 55 sen), projecting an 80% payout ratio (slightly lower than our previous assumption of 83%). We roll forward our valuation horizon with a higher derived DCFbased target price of RM16.90 (from RM15.10). Maintain Sell rating on the back of its lacklustre business outlook. The jet fuel volume (35% of revenue) would be most impacted in 2020E as flights are grounded in view of the global lockdown and travel restrictions. Key upside risks: i) recovery in airline sales volume as grounded flights resume operations, and ii) sharp rebound in global oil prices leading to recognition of inventory lagged gain.

Source: Affin Hwang Research - 22 May 2020