Maintain BUY with a new MYR9.50 TP from MYR10.70, 36% expected total return. This is pegged to lower 9x FY19F P/E. Petron’s 9M18 core profit was above expectations, as the drop in refining margins was not as steep as expected. 3Q18 core profit did plunge 52% YoY on weaker refining margin despite the flattish sales volume recorded. FY18F earnings have been adjusted upwards 24.4%, as the drop in margins was not as huge as expected. However, we maintain our FY19F-20F earnings. In our opinion, we believe the market has overreacted to Petron’s weak margins, with implied FY19F P/E at 6x.

Above expectations. Petron Malaysia posted a 3Q18 core net profit of MYR82m, bringing 9M18 core earnings to MYR257m. This was above our expectations – mainly due to the drop in refining margins not being as steep as we initially thought. YoY, core net profit in 3Q18 plunged 52% despite flattish sales volume (3Q18: 9.1bn bbls vs 9bn bbls last year). This was mainly due to the weaker refining margins caused by higher naphtha prices, which resulted in elevated oil prices. A similar core profit trend was observed in 9M18 as a whole, with a 16% decline witnessed due to a drop in refining margins.

Earnings weakness still within range. While Petron’s earnings have been admittedly weaker YoY, this has already been factored into our full-year net profit estimate, which implies a 35.4% plunge. We believe refining margins in the coming quarters will remain weak due to oil price strength – which typically drives feedstock costs – while end-product prices are expected to edge up at a slower pace. The company’s sales volume growth is expected to be maintained at positive levels (FY18 assumption: 4%), lending support to its earnings base.

In the medium term, we do not foresee Petron making hasty decisions by embarking on capacity expansions via a new plant or an upgrade of the existing Port Dickson Refinery. This is on expectations of weaker refining margins in the next two years due to oil price strength. In terms of improvement works, however, the company is acquiring an existing pipeline to relieve congestion at its Port Dickson product jetty. It has also started the design for a new diesel hydroeater unit to comply with the Euro 5 standard by 2020. This is in line with the Government’s policy that all diesel products sold in Malaysia must comply with this standard.

Maintain BUY with a new TP of MYR9.50. Our FY18F net profit has been adjusted 24.4% upwards, as our previous earnings assumption incorporated overly-conservative refining margin estimates. While we maintain our call, TP has been reduced after being pegged to lower P/E of 8x from 11x – this is based on rolled forward FY19F EPS. The reason why we pegged a lower P/E to Petron was due to its weak refining margins trend. We kept our recommendation intact though, as we believe the share price has overcorrected on the margins weakness.

Source: RHB Securities Research - 16 Nov 2018