• Keep BUY with a new MYR5.43 TP from MYR5.93, with 15.5% expected total return. FY19 earnings came within our expectations, with a core net profit of MYR170m (-24% YoY), comprising 96% of our full-year estimates. Refining spreads have recovered from negatively territory in early January, and is expected to stabilise at current levels. Post the earnings adjustment, we maintain our call on Petron Malaysia, in view of the undemanding valuations and recovering refining margins.

• Within expectations. 4Q19 core earnings of MYR30m (-9% QoQ, a turnaround YoY) brought FY19 core net profit to MYR170m (-24% YoY). At 96% of our full-year estimate, the results came in within our expectations. The absence of any dividend was a negative surprise, as we had initially forecasted 13 sen/share based on a 20% payout ratio.

• QoQ, core profit fell 9% to MYR30m in 4Q19. This was mainly on a lower gross profit as a result of weaker refining margins and higher other operating costs. This has masked higher sales volumes (+5% QoQ) and inventory gains, which were being recognised amidst sequentially stronger crude prices. FY19 core earnings fell 24% to MYR170m, no thanks to weaker refining margins and marked-to-market unrealised inventory losses – this was despite sales volumes improving 2% YoY.

• 2% sales volume growth in FY19. Petron Malaysia recorded a sales volume of 9.2m (5% QoQ, +7% YoY), bringing FY19 sales volumes to 36.3m (+2% YoY). The stronger YoY sales were helped by higher exports amidst flattish domestic sales.

• Spreads recovering from negative territory. Note that Tapis Crude 211’s crack spread has crashed to as low as USD4.10/bbl in early January, but has recovered to USD6.40/bbl recently. However, the YTD 1Q20 average of USD3.00/bbl is still much lower than 4Q19’s USD7.60/bbl and FY19’s USD6.50/bbl. We believe 1Q20 is likely to drop QoQ, in view of weaker refining margins and potential inventory losses. This is because crude oil prices have averaged USD60.50/bbl in 1Q20-YTD, 3% lower than the average of USD62.50/bbl in 4Q19.

• Earnings revisions. We cut our FY20F-21F earnings by 9-14% after imputing lower gross margins. FY22F earnings of MYR200m (+3% YoY) assumes +2% sales volume growth. Post our earnings adjustment, our TP is adjusted to MYR5.43. which is pegged to 9x FY20F P/E. We keep our call on this counter in view of the undemanding valuations and recovering refining margins.

Source: RHB Securities Research - 28 Feb 2020