• Maintain SELL, TP rises to MYR5.65, 15% downside. 1Q19 core profit accounted for 34.4% of our forecast, but this is in line as we expect inventory lag gains to be materially lower in the coming quarters, in tandem with the expectation of Brent prices being range-bound. Refining is expected to be weaker YoY, driven by global oversupply dragging on its earnings base. We roll our valuation to FY20, with our TP reflecting 9x P/E.

• Strong 1Q19 driven by inventory lag gain. 1Q19 core profit was at MYR58m, ie in line despite it accounting for 34.4% of our full-year forecast. We expect the group’s inventory lag gains to normalise to significantly lower levels in the coming quarters as the trend of the Brent oil price is more unfavourable to earnings.

• YoY, core profit declined 20% to MYR58m in 1Q19 mainly due to weaker refining margins vis-a-vis last year, due to weaker market dynamics. This was partially offset by positive inventory gains (in line with the uptrend in the Brent oil price) and higher sales volume (+6%) YoY. While the quantum of inventory gains could not be confirmed, we are confident that the group’s earnings are largely driven by inventory gains/losses.

• Weak refining margin to stay. Global refining margins have declined significantly, with the Tapis Crude 211 crack spread (with product prices including a mix of gasoline and diesel) plunging to USD3.5/bbl, based on latest observations. We believe refining margins could weaken YoY in 2019, with overall demand for refined products staying relatively unchanged – while supply is likely to remain oversized in the global market.

• Maintaining forecasts. Our TP rises to MYR5.65 from MYR5.60 as we roll forward our valuation to FY20, pegged to an unchanged 9x P/E. The group’s earnings are expected to be dragged by weaker refining margins, coupled with the expectation of significantly lower inventory gains in the coming quarters. This is in line with our expectation of Brent oil prices staying range-bound over the same period. Maintain SELL.

• Upside risks to our call: surge in oil prices, and a strong recovery in refining margins.

Source: RHB Securities Research - 31 May 2019