KEY INVESTMENT HIGHLIGHTS

• PetDag’s reported an improved quarterly profit of RM212.7m in 3QFY20, -12.6% lower year-over-year
• Earnings recovery driven by improved sales volume of +34.0%yoy and higher ASP by +23.0%yoy
• Retail segment recorded narrower decline year-over-year from improved ASPs and sales volume
• Commercial segment still reeling from low sales volume and gross margin recorded for both Jet A1 fuel and Diesel
• FY20-21F earnings maintained pending analyst briefing
• Maintain NEUTRAL with unchanged TP of RM19.31 per share

PetDag’s 3QFY20 earning of RM212.7m met expectations. Petronas Dagangan Berhad’s (PetDag) 3QFY20 reported profit came in at RM212.7m. This brought its 9MFY20 cumulative earnings to RM183.0m which was broadly within our but below consensus’s expectations at 44% and 40% of FY20F full-year earnings estimates respectively. Comparing against 3QFY19, revenue dipped by -38.1%yoy whilst its bottomline declined by -11.0%yoy. The decline was mainly attributable to: (i) lower overall sales volume by -22.0%yoy and; (ii) lower overall average selling price by -21.0% during the quarter due to lower MOPS price and the continued enforcement of recovery movement control order (RMCO) during the quarter which has restricted both movements of households as well as; businesses nationwide. Meanwhile, on a quarterly sequential basis revenue climbed by +64.8%qoq whilst earnings surged by >100%qoq respectively which was attributable to improved average selling prices and sales volume by +23.0%qoq and +34.0%qoq respectively during the quarter. Furthermore, the lower revenue year-over-year was offset by lower advertising and marketing costs during the quarter which helped to boost earnings.

Retail Segment. Segment revenue recorded a narrower decline of - 19.4%yoy at RM3,166.4m during the quarter despite: (i) lower sales volume of -3.0%yoy and lower average selling prices by -17.0%yoy during the quarter. The lower sales volume and average selling prices during the quarter was mainly attributable to: (i) lower demand due to enforcement of RMCO and; (ii) low MOPS prices following lower yearover-year crude oil price. That said, the segment’s operating profit increased by +18.6%yoy during the quarter due to lower product costs coupled with lower advertising and promotional expenses during the quarter – which offset the decline in revenue.

Commercial Segment. Segment revenue declined by -57.1%yoy during the quarter. This was mainly due to the decline in average selling prices and sales volume during the quarter for both Jet A1 fuel and diesel. However, the segment returned to black recording an operating profit of RM106.8m (vs -RM2.4m in 2QFY20) despite the continued travel bans imposed for both domestic and international air travels as well as closure of industrial businesses to curb the spread of the novel coronavirus (Covid-19) pandemic.

Third interim dividend of 11.0sen declared. Following the earnings announcement and in-line with a higher reported earnings, PetDag declared has declared its third interim dividend of 11.0sen for the quarter under review. This brings its 9MFY20 dividend declared to-date to 21.0sen vs 45.0 declared during the same period last year. This came above our full year dividend expectations of 34.2sen however; we expect the dividend declared for full year FY20 to be within our expectations. Additionally, the dividend declared to-date also translates to annualised yield of 1.4% to yesterday’s closing price and represents a 36% payout ratio out of its 0.58sen 9MFY20 EPS.

Impact on earnings. We are making no changes to our FY20-21F earnings at this juncture pending its analyst briefing today. That said, we do not discount the fact that we could potentially be revising down its FY20F earnings due to the implementation of conditional movement control order (CMCO) within the Klang Valley since mid-October and a nationwide CMCO since late-October which could once again derail earnings recovery.

Target price maintained. We are maintaining our TP on PetDag at RM19.31 pending its analyst briefing scheduled to be held later today. Our valuation is premised on an unchanged forward PER21 of 25x pegged to EPS21 of 85.5sen. The target PER is based on PetDag’ rolling four-quarter average PER over five years.

Maintain NEUTRAL. All things considered, we are maintaining our NEUTRAL recommendation on PetDag for now pending its analyst briefing to be held today. We made no changes to our recommendation at this juncture given that we are expecting the current enforcement of CMCO to persist possibly into the first quarter of CY21. This is on the heel of elevated newly infected cases of Covid-19 recorded daily in the recent weeks in Malaysia. This new development could derail sales volume recovery during the enforcement period – albeit at a slower pace when compared to the initial implementation of the MCO back in March 2020. That said, we continue to view PetDag positively given its ongoing effort in mitigating the impact from lower selling prices and sales volume via: (i) increasing pump productivity; (ii) aggressive marketing and product promotions and; (iii) creating brand stickiness via SETEL mobile application. Additionally, its fundamentals remain intact and dividend yield is decent at 3.2% for FY21F.

Source: MIDF Research - 18 Nov 2020