The strong sequential 1Q19 was expected given the shocking losses registered in Retail segment in the preceding period. However, volume growth is still limited leading to an unexciting earnings prospect. We believe the sell-down in the past three months due to the dismal 4Q18 results should have reflected the negatives. Thus, we upgrade the stock to MARKET PERFORM, supported by decent yield of c.3% with a revised target price of RM24.95.

1Q19 results no surprises. 1Q19 earnings rebounded strongly by 464% sequentially, after a shocking set of 4Q18 results owing to losses at Retail segment, to RM273.3m which matched expectations as the earnings made up 25%/27% of house/street’s FY19 estimates. Meanwhile, it declared 1st interim NDPS of 15.0 sen (ex-date: 13 Jun; payment date: 27 Jun) in 1Q19 which is higher than 13.0 sen paid in 1Q18 but lower than 25.0 sen final NDPS distributed in 4Q18.

Back on track. Sequentially, 1Q19 Core Profit rebounded solidly to RM273.3m from RM48.4m in 4Q18 as the preceding quarter was badly hit by MOPS price plunge, especially in Nov and Dec as crude oil prices MoM declined sharply by 22% and 8%, respectively. As such, 1Q19 operating profit at Retail segment turned profitable, at RM228.4m from loss-making position of RM41.0m previously. On the other hand, 1Q19 revenue fell 10% QoQ to RM7.09b largely due to 9% drop in ASP and 1% dip in sales volume. In all, revenue for Retail segment fell 4% while Commercial segment contracted 16% over the quarter.

Volume-led YoY earnings growth. Despite flattish top-line, 1Q19 core profit jumped 30% YoY from RM211.0m in 1Q18, primarily due to higher sales volume although it was offset by lower ASP for Retail business. Retail posted 1% dip in revenue as ASP declined 7% while sales volume rose 6%. However, increasing MOPS prices trend led to improved margin, which helped to push segment’s EBIT higher by 38%. Meanwhile, Commercial also posted a 23% jump in EBIT on the back of 1% hike in revenue owing to improved margin and higher volume from Jet fuel and Diesel.

MOPS price stable but volume is still a wildcard. With the fairly stable crude oil prices, price for MOPS is also expected to remain firmer, which helps to keep profit margin stable as well. However, we see little volume growth or worse still a trend downwards for 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. Nonetheless, MOPS’ price movement and business volume remain the key deciding factors to its bottom-line.

All negatives priced in; upgrade to MARKET PERFORM. Share price of PETDAG has fallen 8% since it reported the dismal 4Q18 results three months ago and we believe the negative sentiment should have been fully priced in by now. Thus, we are upgrading the stock to MARKET PERFORM from UNDERPERFORM with a higher target price of RM24.95 from RM24.40 based on unchanged -1SD 3-year moving average of 21.8x as we roll over the valuation base-year to FY20 from FY19 previously. Our recommendation is supported by a decent yield of c.3%.

Risks to our upgraded recommendation include sudden plunge in MOPS prices and weaker-than-expected business volume.

Source: Kenanga Research - 29 May 2019