Period

3Q15/9M15

Actual vs. Expectations

3Q15 results beat expectations, again, with 9M15 net profit of RM697.9m making up 81%/87% of house/street’s full-year FY15 estimates.

Although 3Q15 results were 20% QoQ weaker, the reported results were still better-than-expected which we believe the market including us over-projected a much lower profit margin as crude oil price lingered similar to the previous experience in 4Q14 where the results were badly hit after the sharp decline in Mean of Plats Singapore (MOPS) prices.

Dividends

3rd interim 14.0 sen NDPS was declared in 3Q15 (exdate: 17 Nov; payment date: 04 Dec), totalling YTD 9M15 NDPS to 40.0 sen which is higher than the 38.0 sen paid in 9M14.

Key Results Highlights

Despite revenue inching up only 1%, 3Q15 net profit declined 20% QoQ to RM218.9m from RM273.2m in 2Q15. This was attributable to Retail Segment, which saw its operating profit contracted 31% to RM143m on lower profit margin following the decline in MOPS prices. The rise in group revenue was led by a 3% increase in sales volume despite lower ASP by 3% over the quarter.

YoY, 3Q15 earnings surged 36% from RM160.4m although revenue plummeted 21% to RM6.53b from RM8.23b which was due to an 18% drop in ASP and 3% fall in sales volume. The improved bottomline was driven by lower opex, such as A&P cost and cost reduction efforts, while the Automatic Pricing Mechanism for LPG coupled with better Bitumen margin helped to push profit margin higher.

YTD, 9M15 net profit jumped 39% to RM697.9m while revenue plunged 23% to RM19.12b. The sharp decline in topline was again attributable to ASP, which declined 19% with a 5% drop in sales volume. Lower opex such as lower: (i) manpower expenses on variation in yearly bonus payment, and (ii) A&P costs led better bottomlines.

Outlook

With the strong 1H15 results and reasonable 3Q15 results, FY15 earnings are likely to normalise to pre- 2014 periods. In addition, the current movement of crude oil prices are fairly stable as opposed to the sharp decline during the short time period in 2H14. This could reduce the risk of earnings shock that happened in 2H14. Changes To

Forecasts

We decided to raise our overall product margin assumption to 8.5% from 8%; this leads to a 7%/4% upgrade in FY15E/FY16E estimates.

Rating

Maintain MARKET PERFORM

Valuation

As its valuation has normalised in the past one year, we decided to value the stock based on 3-year moving average of 23.7x from a +0.5 SD 10-year mean of 25.5x. New target price is now raised slightly to RM22.35/share, based on CY16 earnings, from RM22.15/share.

Risks to Our Call

Sudden surge/plunge in business volume and MOPS.

Source: Kenanga Research - 3 Nov 2015