1QFY20 results were yet another disappointment with core profit plummeting 91% sequentially to RM11.5m, no thanks to MOPS losses as well as lower sales volume. Going forth, 2QFY20 earnings are expected to be materially impacted by MCO locally as well as world-wide travelling restrictions. This is in addition to its already lacklustre demand growth domestically leading to a bleak outlook. The stock remains expensive, thus UP with revised lower TP of RM17.95.

1QFY20 missed forecasts yet again. Headline 1QFY20 net loss of RM29.4m disappointed, badly hit by Mean of Platts Singapore (MOPS) loss as oil prices plunged swiftly within a short period which also led to RM36.3m write-down of inventory to net realisable value (NRV) at Commercial Segment. Stripping off EI, including the said NRV writedown, 1QFY20 core profit was RM11.5m which made up merely 2.2%/1.6% of house/street’s full-year FY20 estimates. The discrepancy was largely due to the MOPS losses. It declared 1st interim NDPS of 5.0 sen (ex-date: 03 Jun; payment date: 17 Jun) which is lower than 40.0 sen paid in 4QFY19 and 15.0 sen paid in 1QFY19.

Earnings hit by double whammy… 1QFY20 core profit of RM11.5m plunged sharply from RM131.7m in 4QFY19 with revenue tanking 16% over the quarter. This was largely due to the huge MOPS losses which caused the Retail Segment turning to pre-tax loss of RM84.1m from PBT of RM68.3m. In addition, earnings were also impacted by overall lower volume by 8%, in view of the Movement Control Order (MCO) which had two-week impact in the quarter, coupled with ASP falling 8% as well which also led to the 16% contraction in revenue sequentially.

... due to the effects of MOPS losses and MCO. Similarly, 1QFY20 core profit of RM11.5m plummeted from RM270.9m core profit in 1QFY19 while revenue declined 8% to RM6.55b over the year from RM7.09b. For earnings comparison, apart from MOPS losses, Retail Segment also posted higher opex owing to software maintenance while the lower volume by 5% and 4% for Retail and Commercial Segments also crimped profitability, coupled with 2% and 5% fall in ASP, respectively, also led the 8% decline in group revenue.

MCO and worldwide lockdown to take further toll on earnings. Going forth, the upcoming 2QFY20 results are likely to be severely affected by the MCO and worldwide lockdown which are impacting sales volume substantially as the Retail mogas/diesel and Commercial Jet A1 make up more than half of the group’s sales volume. Given the 1QFY20 MOPS losses and other minor fine-tuning, we cut FY20 and FY21 estimates by 11% and 3%, respectively. Correspondingly, our NDPS is also trimmed proportionally based on unchanged 80% payout.

Outlook remains bleak; maintain UP. Although its share price has fallen 6% in the past one month, its valuation remains expensive at 25x FY21 PER albeit with a decent yield of 3%. Furthermore, its earnings are more vulnerable in this depressed market condition as the restriction on travelling will take a toll on its earnings. We cut our targeted valuation to -4SD 5-year PBV mean of 2.98x from -3SD 5-year PBV mean of 3.26x. This translates to a new target price of RM17.95 from RM19.65 previously. At RM17.95, the stock is valued at 22.5x PER and the current price of RM21.40, at 26.9x, is still not cheap. As such, we maintain our UNDERPERFORM rating. Upside risk to our call is higher-than-expected dividend and a lower-than-expected decline in volume growth should the pandemic is resolved quicker than expected.

Source: Kenanga Research - 19 May 2020