2Q16 earnings were solid with core profit rising 23% sequentially, thanks largely to higher sales volume by 3% while ASP inched up 5%. Nonetheless, the results were well on track with anticipation of softer 2H16 after a solid sales volume-driven 2Q16. Going forward, with crude oil prices at reasonably stable level, earnings shock is unlikely in the 2H16. Maintain OUTPERFORM with unchanged price target of RM25.40.

2Q16 within expectations. At 57%/56% of house/street’s FY16 estimates, 1H16 core net profit of RM488.6m is deemed to be within expectations as we expect 2H16 sales volume to taper off from the strong 2Q16. A 14.0 sen 2nd interim NDPS was declared in 2Q16 (ex-date: 26 Aug; payment date: 30 Aug) which was higher than the 12.0 sen paid in 1Q16 but the same as 2Q15. This brings 1H16 NDPS to 26.0 sen similar to 1H15.

Strong sequential results on higher sales volume. Headline 2Q16 net profit of RM215.0m included: (i) RM89.8m impairment for trade receivables on subsidy claims for diesel for Apr 2012 to Jan 2013, which the government has yet to decide on the repayment, and (ii) RM35.6m gain of disposal of its entire LPG business in Vietnam. Stripping out these items, 2Q16 core profit would have jumped 23% QoQ to RM269.2m. This was mainly due to higher sales volume by 3%, which pushed the group's revenue by 8% to RM5.33b. The higher revenue was also partly attributed to higher ASP by 5%.

YoY, results fell slightly. 2Q16 core profit dipped slightly by 1% from RM273.2m while revenue plunged 18% from RM6.49b, primarily due to a sharp 20% decline in ASP as Mean of Platts Singapore (MOPS) fell despite sales volume rising 3% last year. Similarly, 1H16 revenue declined 19% to RM10.26b from RM12.59b in 1H15 as ASP plummeted 20% although sales volume gained 2%. However, 1H16 core profit rose 2% to RM488.6m from RM479.0m previously as the effective tax rate in 1Q16 was only 24% compared to 27% last year.

ASP likely to stabilise in 3Q16. If oil prices remain at its current level of between USD40-USD50/bbl, the coming quarter ASP is likely to be stabilised. This could reduce the risk of earnings shock in coming quarters. On the other hand, we expect sales volume to taper off in 3Q16 as volume only peaks in early July for the Hari Raya festivals. Overall, earnings are expected to be more stable than previous years as crude oil prices are unlikely to experience sharp declines as in the previous two years,

Maintain OUTPERFORM. We keep our FY16-FY18 earnings estimates unchanged for now. Price target is also maintained at RM25.40/share which is based on an unchanged valuation basis of -0.5 SD 3-year average PER of 27x. Thus, the stock is maintained at 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 - 16 Aug 2016