PETDAG reported a record profit of RM333.6m in 3Q17, largely attributed to lag gains on mogas prices, which saw its operating margin improved significantly to 6.6% from 5.0% previously. Higher sales volume also contributed to the record feat. Although the superb margin may not be repeated in coming quarters, the sterling 3Q17 results should impact its share price positively as it was suppressed by concerns of depleting sales volume with the start of MRT and increasing numbers of electric cars on the road. Retain OUTPERFORM with a revised target of RM25.20.

3Q17 beat estimates. 3Q17 results came above expectations with core earnings surging 39% to RM333.6m, totalling YTD 9M17 core profit to RM825.6m accounted for 81%/87% of house/street’s FY17 estimates. The stronger-than-expected 3Q17 was due to big jump in operating margin of 6.6%, on lag gain, from 5.0% in 1H17, vs. our assumption of 5.7%. A 3rd interim NDPS of 20.0 sen was declared in 3Q17 (ex-date: 23 Nov; payment date: 08 Dec) which is higher than the 14.0 sen paid in both 2Q17 and 3Q16, totalling 9M17 NDPS to 48.0 sen which is higher than the 40.0 sen paid in 9M16.

The strongest quarter. The reported 3Q17 net profit of RM764.6m included RM430.8m disposal gains from the divestment of Vietnam and Philippines LPG assets. Even then, adjusted core profit of RM333.6m is still a record quarterly profit. The results were backed by the recovery of sales volume, which grew 7% despite a 3% decline in ASP. We believe the key mover of the results was lag gains from the previous quarters as its operating margin improved to 6.6% as mentioned above from 5.0% in 1H17. The improved margin is also partly contributed to the increasing Mean of Platts Singapore (MOPS) trend during the quarter.

Earnings helped by better margin. 3Q17 core profit leapt 34% from RM248.8m on the back of a 21% hike in revenue, largely driven by a 3% sales volume growth and 18% jump in ASP beside a strong lag gain mentioned above. Sales volume growth was led by commercial segment, which rose 12% but mitigated by a 4% decline in retail volume while the strong 19% growth in ASP for retail segment and 18% surge for commercial segment drove overall group ASP higher. YTD, 9M17 core earnings grew 12% to RM825.6m from RM738.4 last year as revenue expanded 26% over the year. The earnings were attributed to strong ASP, which jumped 29% as MOPS prices increased but was offset by lower sales volume by 2%.

ASP outlook remains strong but lower sales volume. In view of steady recovery of crude oil price and thus higher MOPS, ASP is expected to be on the uptrend. However, sales volume could be lower given that year-end holiday mostly see more travelling by flights rather than on-the-road travel. On the other hand, the lag gain in 3Q17 may not repeat in 4Q17; thus, earnings will likely come off. Meanwhile, the new weekly review of fuel pump prices should be a positive as it is more reflective of market price compared to the monthly review; thus, resulting in better inventory cost control.

Retain OUTPERFORM. Following the strong 3Q17, we raised FY17- FY18 estimates by 4% each as we upped ASP assumption to 10% from 6% with unchanged EBIT margin of 5.7%. Meanwhile, with lower 3-year moving average of 22.8x from 25.0x previously, our new price target is lowered to RM25.20 from RM26.70 based on CY18 earnings multipliers. We believe the recent sell-down on concerns of lower sales volume, in anticipation of lower traffic volume with the start of MRT and electric cars getting popular, is overdone. With this strong set of results, it is likely to impact its share price positively. Thus, our OUTPERFORM rating is maintained. Risks to our call include sharp drop in business volume and a sudden plunge in MOPS within a brief period of time.

Source: Kenanga Research - 13 Nov 2017