PETDAG delivered yet another solid set of results in 4Q16, which was helped by improved product margins, escalating FY16 net profit to a record high of RM998.9m. FY16 NDPS of 70.0 sen is also a record high as well on regular basis. In the near-term, high traffic volume for CNY festive season should bode well for another solid quarter in 1Q17. All these are price catalysts to PETDAG in the near-term while long-term earnings sustainability is supported by volume growth and operational efficiency. It remains an OUTPERFORM with revised price target of RM26.63/share.

4Q16 above expectations yet again. PETDAG posted 4Q16 results, which beat expectations as the 4Q16 net profit of RM261.5m brought FY16 core earnings to RM998.9m which topped house/street?s estimates by 7%/15%. This is attributable to: (i) better product margin especially for Mogas, and (ii) the decline in 2H16 volume which continued to be lower than expected. A final NDPS of 30.0 sen was declared (ex-date: 06 Mar; payment date: 16 Mar) which brings FY16 NDPS to 70.0 sen vs. 60.0 sen paid in FY15 and our FY16 assumption of 66.0 sen.

Improved margin led sequential results. 4Q16 net profit rose 5% QoQ to RM261.5m from RM248.8m on the back of 8% hike in revenue, thanks largely to better product margin, especially Mogas. This was despite sales volume dipping another 1% from the already weak 3Q16 with lower travel volume on the road as air flight was the preferred choice for year-end holiday. Nonetheless, ASP was higher by 9% which was not unexpected given the recovery of crude oil prices. Having said that, opex was higher owing to higher professional services, repair and maintenance, manpower expenses as well as the seasonal higher depreciation charges in 4Q which dragged earnings growth.

YoY growth also helped by margin plus volume. As 4Q15 results were negatively impacted by lower margin as Mean of Plats Singapore (MOPS) plunged within a short period of time, both 4Q16 and FY16 earnings jumped substantially by 184% and 26% from the same period last year, respectively. In addition, the higher sales volume by 4% and 2% also helped to push earnings higher. On the other hand, revenues for 4Q16 and FY16 fell 1% and 13%, respectively, which was mainly attributable to decline in ASP by 5% and 14% as MOPS declined. However, the drop in ASP did not affect its profitability because the drop in MOPS was gradual over time which smoothened its inventory cost.

Expecting a stronger 1Q17. With Mogas prices on the rise in the past two months as the recovery of crude oil price coupled with weaker MYR, ASP is likely to be higher in 1Q17. However, the price spike was not volatile, which is unlikely to lead to earnings shock in coming quarters. Meanwhile, as 1Q is a seasonally high traffic volume for CNY holiday, business volume should be higher sequentially, thus, leading to better earnings in 1Q17. 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.

Reiterate OUTPERFORM. Post 4Q16, in view of better sales volume and higher Mogas in the past two months, we upgraded FY17-FY18 estimates by 5%/6% as we revised our volume assumption to +2%/+2% from +1%/+1% and ASP to +6%/+1% from +1/+1% previously. Accordingly, price target is raised to RM26.63/share from RM25.48/share based on unchanged 3-year moving average of 26x CY17 PER. We continue to rate the stock OUTPERFORM as this solid set of FY16 results and stronger earnings expected in 1Q17 are price catalysts in the near term. Risks to our call include drop in business volume and a sudden plunge in MOPS within a brief period of time.

Source: Kenanga Research - 22 Feb 2017