Period

4Q15/FY15

Actual vs. Expectations

FY15 net profit of RM790.0m fell short of house/ street’s estimates by 14%/10% given the disappointing 4Q15 results which were hit by lower sales volume by 7% QoQ and thinner retail margin on falling Mean of Plats Singapore (MOPS) prices as crude oil prices plunged c.30% QoQ.

Dividends

Final NDPS of 20.0 sen was declared in 4Q15 (ex-date: 04 Mar; payment date: 17 Mar), totalling FY15 NDPS to 60.0 sen which is the same as FY14.

Key Results Highlights

4Q15 net profit fell sharply by 58% QoQ to RM92.1m from RM218.9m, no thanks to the abovementioned reasons while the 7% decline in sales volume also bogged down group revenue by the same quantum over the same period to RM6.05b from RM6.53b previously. Meanwhile, despite revenue falling 19% YoY, which was due to lower ASP by 18% as MOPS prices declined since Jun 2014 coupled with a 2% drop in sales volume, 4Q15 net profit improved significantly from RM0.4m posted in 3Q14. This was attributable to the sharp decline in MOPS prices in 4Q14, which led to steep margin compression.

YTD, FY15 net income jumped 57% to RM790.0m from RM501.6m in FY14, although revenue fell 22% over the year which was attributed to 19% drop in ASP and 4% fall in sales volume. Again, as the movement of MOPS prices stabilised in 1Q-3Q15 after a sharp decline in 2H14 while the drop in 4Q15 was not as severe as compared to 2H14, profit margin was much better than in FY15 at 4% vs. 2% in FY14, which explained the significant improvement in earnings since it is a volume game business.

Outlook

Although crude oil prices have recovered to the early Jan 2016 levels, it is still lower than 4Q15. Should prices remain depressed for the remaining quarter, 1Q16 ASP is likely to decline QoQ, which may hurt topline. However, in view of the relatively stable movement of crude oil price in contrast to the sharp decline during the brief period in 2H14, this could reduce the risk of earnings shock that happened in 2H14. Changes To

Forecasts

Given the depressed oil prices, we decided to reduce our overall product margin assumption to 7.5% from 8.5%; this led to an 8% cut in FY16E. We also introduce our new FY17/18E numbers which earnings expected to grow at 9/1% on the back of: (i) product margin of 8.1%, and (ii) 1% growth in ASP and volume.

Rating

Downgrade to UNDERPERFORM from MARKET PERFORM

Valuation

Given the disappointing earnings and a likely weak 1Q16 as oil prices remain sluggish, we decided to value the stock at -0.5SD 3-year moving average PER of 28.0x from the previous 3-year moving mean PER of 23.7x. Thus, the new target price is now raised to RM24.20/share from RM22.35/share previously, based on CY16 earnings.

Despite the higher price target, its share price has risen by 13% since early Nov 2015 and raced ahead of valuations; thus, we are downgrading the stock to UNDERPERFORM.

Risks to Our Call

Sudden surge in business volume and MOPS.

Source: Kenanga Research - 22 Feb 2016