PETRONM’s 1QFY24 results met our forecast. Its 1QFY24 core net profit contracted 36% YoY due to poor crack spreads. Moving forward, we expect its refining margins to remain capped due to excess refining capacity and long-term structural decline in demand due to the adoption of EVs. We maintain our forecasts, TP of RM4.74 and MARKET PERFORM call.

Its 1QFY24 net profit of RM69.7m met our expectation at 26% of our full- year forecast. Consensus estimate is unavailable.

YoY, its 1QFY24 revenue grew 22% driven by: (i) higher sales volume of 9.8m barrels (+18%) as domestic demand grew, and (ii) higher average oil prices (+2%). However, its net profit dropped 36% mainly due to: (i) the softening crack spreads, and (ii) the loss on derivatives of RM64.9m (vs. gain a year ago) arising from the recognition of marked- to-market commodity hedge loss as oil prices surge.

QoQ, its 1QFY24 net profit surged 68%, thanks to better refining margins and higher sales volume (+3%), partially offset by lower product market prices.

Forecasts. Maintained.

Valuations. We also maintain our TP of RM4.74 based on unchanged 5x FY24F PER, in line with average valuation of its closest peer HENGYUAN (Not Rated). 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. In our local front, the government will begin cutting fuel subsidies to bolster its fiscal position, starting with diesel, thereby expediting the adoption of EVs. 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 - 24 May 2024