We are upgrading PETDAG to OUTPERFORM at a new price target of RM25.40/share following recent share price weakness. Yesterday’s 1Q16 earning release threw no surprises with bottomline normalised sequentially from margin compressed 4Q15 on MOPS shock. Going forward, with crude oil price at year’s high with more stable price movement, earnings shock is unlikely in the upcoming 2Q16. All these should be good reasons enough to accumulate this index-linked stock.

1Q16 in line. PETDAG reported 1Q16 results, which came within expectations with the net profit of RM219.4m accounting for 26%/25% of house/street’s FY16 full-year estimate. A 12.0 sen NDPS was declared in 1Q16 (ex-date: 24 May; payment date: 08 Jun) which was lower than the 20.0 sen paid in 4Q15 but the same as 1Q15.

Earnings normalised sequentially. Despite revenue sliding 18% QoQ to RM4.93b, 1Q16 net profit surged 138% to RM219.4m from RM92.1m in 4Q15 as the preceding quarter results were hit by sharp decline for a brief period for Mean of Plats Singapore (MOPS) prices as crude oil prices plunged c.30% QoQ back then. In addition, 1Q16 opex was lower by RM107.1m on lower repair and maintenance as well as lower staff costs. On the other hand, the decline in topline was mainly led by a 21% contraction in overall ASP, but sales volume increased.

YoY, results were fairly flattish. 1Q16 net profit rose 7% YoY from RM205.8m the same quarter last year which was mainly helped by higher other income by RM27.0m, due to accounting reclassification arising from GST implementation as well as higher interest income. Meanwhile, 1Q16 revenue declined 19% from RM6.10b in 1Q15 as overall ASP fell 20% as MOPS decreased. This included a 12% dip in ASP for retail segment and a 29% plunge in ASP for commercial segment.

 ASP likely to recover in 2Q16. If prices remain at its current high level or trend higher for the remaining quarter, 2Q16 ASP is likely to be stronger QoQ, which may help to boost topline. Meanwhile, in view of the relatively stable movement of crude oil price in contrast to the sharp decline during the brief period in 2H14 and 4Q15, this could reduce the risk of earnings shock in coming quarters.

Upgrade to OUTPERFORM. We keep our FY16/FY18 estimates unchanged for now. With the rolling over of valuation base-year to CY17 from CY16, our new price target is now raised to RM25.40/share, based on -0.5SD 3-year moving average PER of 27x, from RM24.20/share previously, which was pegged to -0.5SD 3-year moving average PER of 28x. The share price of PETDAG has fallen 11% since our last downgrade to UNDERPERFORM three months ago. The recent price weakness presents a good buying opportunity to accumulate this indexlinked stock. Hence, we are upgrading the stock to OUTPERFORM. Risks to our call include drop in business volume and a sudden plunge in MOPS within a brief period of time. 

Source: Kenanga Research - 12 May 2016