3QFY20 core earnings jumped exponentially QoQ, exceeding our expectation, as the easing of travel restrictions during the quarter led to higher sales volumes and ASPs. Nonetheless moving forward, we believe the implementation of the CMCO in 4QFY20 may have an impact on upcoming results, while weak air travels would also continue to drag its commercial segment. Maintain UP, with TP of RM16.00 given lofty valuation.

9MFY20 above our expectations. 9MFY20 recorded core net profit of RM224m, coming in above our expectation at 85% of full-year earnings forecast, due to stronger-than-expected sales in the 3QFY20 following the easing of travel restrictions nationwide. However, the results were below consensus, making up only 67% of the forecast. We believe this is due to consensus over-estimating sales recovery in 3QFY20. Meanwhile, announced interim dividend of 11.0 sen brings YTD dividends to 21.0 sen per share – also exceeding our expectation.

Stronger quarter following easing of travel restrictions. 3QFY20 core net profit of RM209m jumped exponentially QoQ, following the easing of travel restrictions nationwide. This resulted in higher sales volumes and average selling prices for both its core retail and commercial segments. YoY, 3QFY20 declined 14%, dragged by the weaker commercial segment following the decrease in sales volumes amidst lower demand for jet fuel. Nonetheless, this was offset by better performance in its retail segment. While retail segment saw lower revenue following poorer sales volumes and product prices, the segment’s contribution managed to increase given the lower operating expenditure from less advertising and promotional activities during the quarter.

Cumulatively, YTD-9MFY20 saw core earnings plunging 68% YoY, as lockdown efforts following the outbreak of the Covid-19 pandemic saw near annihilation of earnings in 1HFY20.

Potential impact from CMCO in 4QFY20. We believe the recent implementation of the Conditional Movement Control Order (CMCO) in several states across the country is likely to impact sales demand for its retail segment going into 4QFY20. Meanwhile, the immediate outlook for its commercial segment is also expected to remain sluggish as air travel has yet to recover amidst the global pandemic.

Maintain UNDERPERFORM, with higher TP of RM16.00 (from RM15.60 previously), pegged to unchanged valuation of 26x PER on FY21E EPS – roughly in-line with its historical average. Post-results, our FY20E/FY21E earnings forecasts were raised by 25%/2% as we raised our sales assumptions.

While we feel that our applied valuations have been rather generous (ascribing close to mean valuations despite the challenging economic environment), our TP still implies a significant downside from current prices. At current level, valuations are extremely lofty (trading at forward PER of 32x on FY21E EPS).

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

Source: Kenanga Research - 18 Nov 2020