The market has been overly optimistic on PETDAG as the swift rebound from a 5-year low is overshooting its fundamentals, in our view. Even based on FY21E PER valuation with earnings expected to normalize then, it is still priced 72% higher than FBMKLCI’s valuation. 1HFY20 earnings will be materially impacted from the local MCO and worldwide lockdown which led us to cut earnings by 42% for FY20. As such, we cut the stock to UP from MP with a lower TP of RM19.65. Ideal entry price is RM17.95.

Earnings risk is not fully factored in. PETDAG was not spared the market meltdown led by the virus pandemic and oil price plunge which saw its share price plunging to as low as RM17.50 on 17 Mar - the lowest seen in Feb 2015. But we believe the impact of Movement Control Order (MCO) and worldwide lockdown have not been fully reflected given that its share price has since recovered strongly by 21% from the low, reducing its YTD losses to 7% against FBMKLCI’s -15%. This is in addition to its already lackluster demand growth prior to the current crisis given the change of commuting mode within the Klang Valley as well as proliferation of fuel-efficient vehicles limiting fuel consumption growth. Although we opine that it may continue to distribute almost all its earnings as dividend given its cash position, a shrinking demand growth would cap dividend payout growth, going forward.

Worldwide lockdown to take a toll on its earnings. We have learnt that sales volume for certain petrol stations have declined 60-65% currently as the MCO keeps people at home. Moreover, worldwide lockdown also saw air travel disrupted which was witnessed by a sharp decline of 64% YoY in total passengers in the month of March as reported by AIRPORT (OP; TP: RM5.70) last Friday. With the MCO extension to 28 Apr, and even if the order is lifted by then, the government may still restrict commuting, while the 14-day quarantine imposed on tourists globally would still see subdued air traffic. Thus, this will definitely continue to affect demand growth for the next six months. Therefore, we expect a recovery only by end of 3QCY20. For FY19, mogas made up 32% of PETDAG’s sales volume while jet fuel Jet A1 accounted for 19% of total volume. In addition, diesel which consists of retail and commercial business segment attributed 30% to sales volume in FY19.

Cut FY20 earnings sharply by 42%. We expect its 1HFY20 results to be severely affected by the MCO and worldwide lockdown which are impacting sales volume substantially as the retail mogas/diesel and Jet A1 make up more than half of the group’s sales volume. We are now expecting a 15% decline in FY20 sales volume to 13.3m liters, against a 4% growth assumption previously to 16.3m litters, from 15.6m liters registered in FY19. This is on the basis that volume will normalize after a 3-month hit for on-the-road traffic and a 9-month impact to air travel. Thus, we slashed FY20 earnings by 42%. We also cut FY21 estimates by 12% as our new 10% volume growth to 14.6m liters is lower than our previous assumption of 16.5m liters. Our NDPS projection is also cut proportionally based on unchanged payout ratio of 80%.

Overpriced; cut to UNDERPERFORM. In our opinion, its current valuation is fairly demanding. At 25.8x FY21E PER with 3.1% yield assuming demand normalize in FY21, PETDAG is expensive as compared to FBMKLCI valuation of 15x and dividend yield of 4.7%. And, PETDAG’s earning is more vulnerable at current depressed market condition. As such, we are downgrading the stock to UP from MP. Our new target price is RM19.65 based on new valuation method of PBV at -3SD 5-year mean of 3.26x, from RM21.35 based on -1SD 3- year mean of 22.2 PER. Ideal entry price is RM17.95 based on a fullblown financial crisis valuation of -4SD 5-year PBV mean of 2.98x.

Upside risk to our call is higher-than-expected dividend and a lowerthan-expected decline in volume growth should the pandemic subside quicker-than-expected.

Source: Kenanga Research - 14 Apr 2020