1HFY20 results vastly disappointed, dragged by decline in sales volumes and selling prices as a result of the MCO, also in tandem with weaker crude oil prices, leading to an almost annihilation of profit YoY. We expect improvements in the 2HFY20 as lockdown has eased, prompting a gradual resumption in overall economic activities, while crude oil prices have also recovered, albeit mildly. Nonetheless, UNDERPERFORM call is reiterated, given its extremely lofty valuations, with a lower TP of RM15.60.

1HFY20 below expectations. 1HFY20 core net profit came in at RM14.4m, hugely missing expectations, coming in at only 3% of our and consensus full-year earnings forecasts, due to underperformance in both its core retail and commercial segments. The implementation of the movement control order (MCO) led to overall sales volumes decline, particularly in the months of April and May 2020, while average selling prices (ASP) also declined, in tandem with the weakened crude oil prices. The group announced an interim dividend of 5.0 sen per share, bringing YTD dividends to 10.0 sen per share (versus 1HFY19 of 29.0 sen) – which also fell below expectations. (This reports marks a change in coverage analyst).

Dragged by lower volumes and ASPs. 1HFY20 saw profit annihilated 97% YoY. As aforementioned, overall sales volumes saw a decline of 22% YoY, particularly in the months of April and May 2020, due to the MCO, while ASP had also fallen 17% YoY in tandem with the weakened oil prices. For the individual quarter of 2QFY20, core net profit plunged 98% YoY to RM2.9m as sales volume declined by 39% while ASP declined 37%, similarly due to aforementioned reasons. Sequentially, core net profit also plummeted 74% QoQ. While the retail segment had managed to turn around from losses QoQ, it was not sufficient to offset the huge upset in the commercial segment, which plunged into losses. Sales volumes during the quarter were lower by 35% QoQ, while ASP also declined 32%.

Expecting a better 2H. While 1HFY20 was plagued by weaker sales demand due to the implementation of the MCO, a stronger 2HFY20 is largely expected, given the easing of lockdown measures leading to a gradual recovery of overall economic activities. This also comes in tandem with mild rebound in crude oil prices of late, which should see some improvements in the group’s ASPs and margin spread. Post results, we slashed our FY20/21E earnings by 44%/25% to account for lower sales volumes, ASPs and weakened margin spread.

Reiterate UNDERPERFORM, with new TP of RM15.60, pegged to 26x PER on FY21E EPS – in-line with its historical average (versus previous TP of RM17.95 at 3.26x PBV).

Despite the expected improvements in the coming quarters, current valuations are already extremely lofty (trading at 35x forward PER on FY21E EPS). While we feel that our applied valuations have been rather generous (ascribing mean valuations despite the challenging economic environment), our TP still implies a significant downside from current prices. As such, we would recommend to stay away from this name for the time being until its fundamentals catch up to the current valuations.

Risks to our call includes (i) better-than-expected ASPs, (ii) unexpected sudden surge in oil prices, (iii) higher-than-expected sales volumes.

Source: Kenanga Research - 26 Aug 2020