1HFY21 results came below expectations, dragged by lower product margin spreads amidst the normalisation of underlying oil prices, coupled with slower sales volume during the 2QFY21 quarter, compared to the prior sequential quarter. Moving forward, we believe the upcoming 3QFY21 quarter may be sequentially weaker, given the imposition of nationwide “lockdown” possibly impacting sales volumes. Maintain MP albeit with a lowered TP of RM18.90.

1HFY21 below expectations. 1HFY21 core net profit of RM266m came in below expectations at 39% of our, and 40% of consensus, full-year forecasts, dragged by a decline in product margin spreads amidst the normalisation of oil prices during the 2QFY21 quarter, coupled with lower-than-expected sales volumes. Likewise, announced interim dividend of 10.0 sen per share brought YTD dividends to 24.0 sen – also deemed as below expectations.

Sequential decline, but improved from last year. 2QFY21 recorded core net profit of RM81m – representing a 56% decline QoQ, dragged by weaker product margins in tandem with the normalisation of underlying oil prices, coupled with slower sales volumes given the re- implementation of MCO during the quarter. Nonetheless, YoY, 2QFY21 earnings jumped multi-folds, helped by improved product margins and prices, coupled with a sharp recovery in sales volume (recall that last year, 2QFY20 was peak movement restrictions on top of steep plunge in oil prices). Cumulatively, 1HFY21 core earnings also improved multi- folds, similarly thanks to improved margins and prices, coupled with better sales volumes.

Potentially weaker quarter ahead. We believe the upcoming 3QFY21 quarter may potentially post sequentially weaker numbers as the imposition of the nationwide “total lockdown” could affect sales volumes. Nonetheless, given the gradually increasing vaccination rates, we are hopeful of earnings recovery in FY22.

Maintain MARKET PERFORM. Post results, we lower our FY21E/FY22E earnings by 11%/5% on the back of lower margins spread and sales volume assumptions. As a result, our TP is also lowered to RM18.90 (from RM19.80 previously) – pegged to unchanged valuations of 26x PER.

Risks to our call include: (i) better-than-expected ASPs, and (ii) higher-than-expected sales volumes.

Source: Kenanga Research - 24 Aug 2021