PETRONM's 9MFY24 results missed our forecast due to persistently weak crack spreads impacted by concerns over China's economic slowdown and Saudi Aramco's increased production. Looking ahead, we expect refining margins to remain under pressure from declining demand due to the adoption of EVs and excess refining capacity. We cut our FY24F earnings by 44% but maintain our TP of RM4.15 with MARKET PERFORM call.

Below expectation. Its 9MFY24 net profit of RM87.6m disappointed coming in at only 49% of our full-year forecast. The variance against our forecast came largely from its weaker-than-expected crack spreads.

YoY, its 9MFY24 revenue was flattish due to higher sales volume of 28m barrels (+2%) driven by jet fuel sales and liquified petroleum gas but partially offset by lower ASPs. Its net profit shrank 62%, no thanks to weaker crack spreads, which were influenced by concerns over China's economic slowdown and Saudi Aramco's decision to increase production to regain market share.

QoQ, similarly, its 3QFY24 net profit plunged 65% dragged by lower ASP and weak refining margins.

Forecasts. We cut our FY24F earnings by 44% to reflect lower assumptions for spreads while maintaining our FY25F numbers.

Valuations. We maintain our TP of RM4.15 based on unchanged 5x FY25F 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 amid 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. On a brighter note, easing geopolitical tensions are anticipated to lead to more stable crude prices, thereby contributing to earnings stability. 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 - 22 Nov 2024