FY19 results were a big let-down which saw 4QFY19 core profit plunging 46% QoQ due to higher product costs and opex. Meanwhile, the sharp fall in oil prices since beginning of the year coupled with the Covid-19 outbreak could put its upcoming 1QFY20 results under pressure. We believe its current share price has partly factored these issues. Hence, we keep our MP rating unchanged with revised TP of RM21.35 supported by decent dividend yields of >3.0%.

FY19 missed forecasts. At 87%/89% of house/street’s estimates, FY19 core profit of RM822.5m fell short of expectations, as 4QFY19 core income plunged 46% sequentially to RM131.7m, which was due to higher product costs and operating expenses arising from higher A&P and network upgrade costs. Meanwhile, it declared 4th interim NDPS of 25.0 sen with a surprise special NDPS of 15.0 sen in 4QFY19, (ex-date: 10 Mar; payment date: 26 Mar) totalling FY19 NDPS to 85.0 sen or 103% payout which is higher than 70.0 sen or 83% payout paid in FY18 and our estimate of 66.6 sen or 70% payout.

4QFY19 earnings hit by high product costs and opex. While revenue was flattish at RM7.79b, 4QFY19 core profit plummeted 46% sequentially to RM131.7m from RM244.4m in the preceding quarter due to lower volume and higher product costs. In addition, operating expenses jumped on higher A&P and network upgrade costs at Retail Segment. Looking into segmentation, Retail Segment experienced a 60% contraction in operating profit to RM68.3m while Commercial Segment saw EBIT falling 19% over the quarter to RM124.9m.

Last year’s results partly hit by MOPS. YoY, 4QFY19 core profit rebounded solidly by 172% from RM48.4m in 4QFY18 as last year’s earnings were badly hit by unfavourable Mean of Platts Singapore (MOPS) price trend while the 6% hike in sales volume at Retail Segment following improved station productivity helped to boost profit margin. FY19 core profit fell marginally by 2% to RM822.5m from RM837.4m albeit revenue inching up slightly by 1%. The slight dip in earnings was due to abovementioned higher A&P and network upgrade costs for Retail Segment but Commercial Segment posted slightly higher earnings due to higher volume.

Crude oil prices yet again volatile which would lead to margin compression. After a fairly stable uptrend in oil prices in 4QCY19, the recent sharp decline in Brent from c.USD70/bbl in early Jan to c.USD53/bbl in early Feb could mean that MOPS prices are likely to be unfavourable, thus affecting profit margin in 1QFY20. On other hand, the Covid-19 outbreak since end-Jan is impacting air travel volume badly. As such, this will add pressure to the already lacklustre volume growth or worse still a downward trend. With all these background, we cut FY20 estimates by 11% but raise NDPS as our earnings payout assumption is increased to 80% from 70% previously. We also introduce FY21 forecasts in which we expect earnings to grow marginally by 2%.

MARKET PERFORM maintained. Post earnings revision, we cut our target price to RM21.35 from RM22.75 as we based it on -1.5SD 3-year moving average of 23.3x from -1.0SD 3-year moving average of 22.2x as the potential higher risk of MOPS trend could hit bottomline in the coming 1QFY20. Thus, we keep our MARKET PERFORM rating which is supported by a decent dividend yields of >3%. Upside risks to our recommendation include sudden plunge in MOPS prices and weakerthan-expected business volume.

Source: Kenanga Research - 26 Feb 2020