PETRONM’s FY23 results disappointed on poor crack spreads, partially offset by a higher sales volume. We expect crack spreads to remain unfavourable over the immediate term, due to excess refining capacity coupled with weak demand for refined products amidst a soft global economy. We maintain our forecasts, TP of RM4.74 and MARKET PERFORM call.

Its FY23 net profit of RM295m missed our forecast by 8%. The variance against our forecast came largely from weaker-than-expected crack spreads. Consensus estimate is unavailable as we are the only research house covering the stock in the market.

YoY, its FY23 revenue fell 6% due to lower product market prices, partially mitigated by a higher sales volume of 37.1m barrels (+10%) as domestic demand grew. Its net profit dropped by a steeper 9% mainly due to poor crack spreads.

QoQ, its 4QFY23 net profit plunged 49% dragged by: (i) a lower sales volume (-3%), (ii) a lower ASP, and (iii) weak refining margins.

Forecasts. We maintain our FY24F earnings while introducing FY25F numbers.

Valuations. Consequently, we maintain our TP of RM4.74 based on unchanged 5x FY24F PER, in line with average valuation of its closest peer HENGYUAN. Our ascribed valuation benchmark is also broadly in line with its listed global peers such as TOA Oil, Phillips 66, HF Sinclair, Valero, Marathon Petroleum. Note that our TP imputes a 5% discount to reflect a 2-star ESG rating as appraised by us (see Page 4).

Outlook. We expect regional crack spreads to remain unfavourable over the immediate term given the increased availability of refining capacity in the market with refineries coming back online after the recent maintenance cycle, coupled with weak demand for refined products amidst a soft global economy. Over the longer term, the transition to renewable energy, particularly the adoption of EVs will result in a structural decline in the demand for refined products. Maintain MARKET PERFORM.

Risks to our call include: (i) prolonged overcapacity in the refining sector; (ii) weak demand for refined products on a soft global economy; and (iii) unplanned plant shutdown.

Source: Kenanga Research - 23 Feb 2024