4Q18 core profit of RM48.4m, the lowest quarterly earnings in four year, was a big let-down owing to the plunge in MOPS prices. Meanwhile, sales volume in FY18 was tepid, which is likely to continue in the future as overall market volume is shrinking. Given the high volatility in oil prices, limited volume growth and the dismal 4Q18 results, we cut PETDAG to UNDERPERFORM with a lower target price of RM24.40.

4Q18 below expectations. At 81% each of house/street’s FY18 estimates, FY18 core profit of RM837.4m came far below expectations given the shocking losses at Retail segment as the plunge in MOPS prices impacted badly on its mogas and diesel. It declared a final NDPS of 25.0 sen (ex-date: 11 Mar; payment date: 13 Mar) in 4Q18, which is lower than 49.0 sen final NDPS paid in 4Q17. This took FY18 NDPS to 70.0 sen (83% payout) vs. our forecast of 73.2 sen (70% payout) and 97.0 sen (87% payout) in FY17.

Badly hit by MOPS price plunge. Despite revenue inching up 1%, 4Q18 core profit plummeted by 82% QoQ to RM48.4m, primarily due to the plunge in MOPS in Nov18 and Dec18, which was in tandem with the sharp MoM decline of 22% and 8% for crude oil prices over the same period. This situation was the same as in 4Q14 and 4Q15 where PETDAG’s results were badly impacted by the plunge in MOPS back then. As such, Retail segment reported operating loss of RM41.0m while Commercial business saw a 32% decline in operating profit to RM106.3m. Meanwhile, the 1% increase in revenue was led by 4% volume growth in Commercial segment.

MOPS price’s tumble also took a toll on YoY results. Similarly, 4Q18 and FY18 core profits contracted 83% and 24% YoY to RM48.4m and RM837.4m, despite 13% and 11% hike revenues, respectively on the abovementioned MOPS price issue. In addition, the lower LPG margin on higher product costs, higher A&P and repair & maintenance works also capped profits from growing higher. On the other hand, tepid sales volume was not unexpected given the increasing electric vehicle trend and improving public transportation in the urban areas. The improvement in revenue was largely ASP driven.

MOPS price volatility and volume are keys to bottom-line. In the upcoming 1Q19, volume is likely to improve from the seasonally weak 4Q as the CNY festive season will see more traffic volume albeit Feb being a shorter month. However, we see little volume growth or worse still a trend downwards in its fuel segment given the change in means of commuting especially in Klang Valley with the launch of MRT as well as the trend of electric vehicles. Meanwhile, the crude oil volatility is manageable than the 22% monthly plunge last November, which will lessen earnings shock like the case in 4Q18. However, MOPS price movement and business volume remain the key deciding factors to its bottom-line.

Cut to UNDERPERFORM. We keep FY19 estimates unchanged as we believe 4Q18’s case is one-off event and introduce FY20 numbers in which earnings are expected to grow at 2.2% on the back of 1% volume growth. Although the dismal 4Q18 is an isolated case, we expect a negative impact on sentiment. Thus, we downgrade the stock to UNDERPERFORM, from MARKET PERFORM, with a lower target price of RM24.40 based on -1SD 3-year moving average of 21.8x CY19 PER, from RM25.50 which was based on 3-year moving average of 22.9x CY19E PER. Risks to our downgrade include better-than-expected business volume and significant improvement in profit margins.

Source: Kenanga Research - 27 Feb 2019