3Q16 result was a pleasant surprise which beat forecasts despite a lower sales volume from high base in the preceding quarter, as higher ASP and margin improvement helped to produce a solid set of results. As year-end traveling season is up again while oil prices are fairly less volatile, the final quarter is predictably another good quarter. Thus, we maintain our OUTPERFORM call with revised price target of RM25.48.

3Q16 beat expectations. PETDAG reported 3Q16 results which came above expectations as the 3Q16 net profit of RM248.8m brought YTD 9M16 core earnings to RM737.4m which made up 86%/85% of house/street’s FY16 estimates. This was mainly due to: (i) the decline in 3Q16 volume was lower than expected, and (ii) higher ASP partly helped to push margin higher especially for the Commercial segment. A 14.0 sen 3rd interim NDPS was declared in 3Q16 (ex-date: 21 Nov; payment date: 8 Dec) which is the same as 2Q16 and 3Q15. This brings 9M16 NDPS to 40.0 sen similar to 9M15.

Sequential results dent by higher taxation. Headline net profit in 3Q16 jumped 16% QoQ to RM248.8m from RM216.0m in 2Q16 that included: (i) RM89.8m impairment for trade receivables on subsidy claims for diesel for Apr 2012 to Jan 2013, and (ii) RM35.6m gain of disposal of its entire LPG business in Vietnam. Adjusting these items from the previous quarter, 3Q16 earnings declined 8%, despite revenue rising 4%, largely due to higher taxation reported in 3Q16 with an effective tax rate of 25% from 24%. In fact, the operating numbers in 3Q16 were fairly strong despite sales volume dipping 1% from the high base in 2Q16 as ASP rose 5% over the quarter. This was reflected in the 4% increase in revenue. The higher ASP, especially in Commercial segment also helped to expand profit margin.

Margin improvement led YoY growth. Despite falling ASP YoY as Mean of Plats Singapore (MOPS) collapsed, it managed to register a 14% jump in 3Q16 earnings and 6% increase in 9M16 core net profit. This was largely attributed to improved Diesel margin for both Retail and Commercial segments as well as other income. In 3Q16, ASP for Retail segment fell 15% from last year while Commercial segment slid 11% causing ASP at the group level to decline by 13%. YTD, 9M16 ASP plunged 18% as ASP for Retail segment dropped 14% while Commercial segment plummeted by 21%. We believe the drop in ASP did not affect its profitability because the drop in MOPS was gradual over time which smoothened its inventory cost.

ASP likely to stabilise in 4Q16. With crude oil price falling back to midUSD40/bbl levels, which is similar to 2Q16-3Q16 levels, the coming quarter ASP is likely to stabilise. This could reduce the risk of earnings shock in coming quarters. On the other hand, sales volume is likely to rebound in 4Q16 given the school and year-end holidays travelling seasons. 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. In view of solid sales volume and improved ASP, we raised our FY16-FY18 estimates by 4%-9% as we revised FY16 volume growth to 2% from 1% but maintained 1% each for FY17 and FY18. ASP is revised to -17% from -20% for FY16, but we keep 1% growth target for FY17-FY18. Post earnings revision, our new price target is now RM25.48/share based on the 2-year mean of 26x CY17 PER from RM25.40/share 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 - 9 Nov 2016