Despite higher sales volumes, 1QFY22 results came in poorer, dragged by losses in its commercial segment amidst higher product costs. While sales volumes are certainly expected to remain healthy in tandem with the resumption of economic activities, the volatile fluctuations of underlying crude oil and product prices remain, and thus, cost management may be crucial going forward. Following a slash in our earnings estimates, we downgrade the stock to UNDERPERFORM with a TP of RM17.85.

1QFY22 results below expectations. 1QFY22 core net profit of RM126m came in below expectations at only 17% each of our and consensus full-year earnings estimates, due to the losses suffered in its commercial segment amidst higher product costs. Consequently, interim dividend of 5.0 sen per share is also below expectation.

Dragged by higher product costs. YoY, 1QFY22 core net profit plunged 32%. Despite the stronger retail segment, helped by higher sales volumes, its commercial segment dipped into losses, dragged by higher product costs. QoQ, 1QFY22 core net profit similarly plunged, by 21%, again due to losses in its commercial segment, partially offset by the stronger retail segment.

Sales volumes to stay healthy. With the lifting of movement restrictions, PETDAG’s sales volumes are certainly expected to remain healthy amidst the higher demand. However, as the underlying crude oil and product prices remains volatile, we believe cost management and expansion of revenue streams may be crucial going forward. As such, PETDAG is seeking to further expand their convenience segment in order to maximise revenue per station.

Downgrade to UNDERPERFORM (from MARKET PERFORM previously). Post results, we slashed our FY22E/FY23E earnings by 26%/11% to account for the poorer product margins. Following so, our TP is also lowered to RM17.85 (from RM20.10 previously) – pegged to an unchanged PER of 26x – broadly in-line with the group’s mean valuation.

Risk to our call include: (i) better-than-expected product margins, (ii) stronger-than-expected volume sales.

Source: Kenanga Research - 27 May 2022