PETDAG reported its lowest quarterly earnings in two years, owing to higher product costs coupled with sliding sales volumes. However, we still expect volume to grow by 1% in FY18 as a fixed or cheaper fuel price should encourage traffic flow. We also see the reversal to old subsidy system having a neutral impact to PETDAG. Given the disappointing 1Q18 and 9% YTD price appreciation, we cut PETDAG to MARKET PERFORM with a revised target price of RM25.50.

1Q18 missed expectations. At 18%/20% of house/street’s FY18 estimates, 1Q18 core profit of RM210.9m came sharply below expectations. The main culprits are higher product costs coupled with lower sales volume despite higher ASP. It declared its first interim NDPS of 13.0 sen (ex-date: 01 Jun; payment date: 14 Jun) in 1Q18 against 14.0 sen and 49.0 sen (inclusive of 27.0 sen regular and 22.0 sen special) paid in 1Q17 and 4Q17, respectively.

The worst quarter in two years. 1Q18 core profit of RM210.9m plunged 24% sequentially from RM279.3m in 4Q17 despite revenue inching up by 1% to RM7.07b from RM6.99b previously. This was principally owing to higher product costs, especially for Retail segment, which saw its operating margin deteriorating to 4.5% from 6.3% previously while Commercial segment’s margin fell slightly to 3.5% from 3.6%. Overall, group’s operating margin fell to 4.1% from 5.3% previously. On the other hand, the rise in revenue was led by higher ASP which firmed up 3% although sale volume was lowered by 4%.

Results impacted by higher product costs. YoY, 1Q18 core profit contracted 17% from RM252.8m although revenue rose 6% from RM6.69b. This was led by the abovementioned decline in Retail earnings on higher product costs, which resulted in segment operating margin falling from 5.6% to 4.5%. However, this was mitigated by higher Mogas margin on lower product cost. In addition, opex was higher in 1Q18 due to higher salaries, wages and benefit expense. On the other hand, Commercial reported lower earnings on higher opex. Overall, Retail saw 2% decline in sales volume while Commercial posted higher revenue on higher ASP and volume growth.

Fuel price to maintain for now. The new PH Government decided to maintain fuel prices since it won the GE14 on 9 May as opposed to the previous weekly review every Wednesday. The new PM said that the government will subsidise whenever costs are higher than selling price. This means it will revert to the old system which was implemented prior to Dec 2014. Nonetheless, the new measure has neutral impact to PETDAG’s earnings but may affect it cash-flow given the timing to claim back the refund. With its current cash in hand of RM2.69b, PETDAG should have enough financial strength to facilitate the change. On the other hand, a fixed or cheaper fuel price may encourage traffic flow which is good for sales volumes.

Cut to MARKET PERFORM. In view of the disappointing 1Q18 results, we trimmed FY18/FY19 estimates by 13%/9% as we adjust: (i) volume growth to 1%/1% from 2%/1%, and (ii) operating margin to 4.99%/5.23% from 5.65%/5.65%. Post earnings revision, we cut target price to RM25.50 from RM27.85 on higher 3-year moving average of 22.9x CY19 PER of from 22.1x previously. We also downgrade the stock to MARKET PERFORM and OUTPERFORM as we believe most positives have been priced in following its share price run-up of 9% YTD. Our recommendation is supported by a decent dividend yield of c.3%. Risks to our downgrading include better-than-expected business volume and significant improvement in profit margins.

Source: Kenanga Research - 21 May 2018