• Downgrade to NEUTRAL from Buy with a new MYR3.02 TP from MYR5.43, 9% expected total return. We believe 1Q20 earnings will be weaker QoQ and YoY, dragged by potential inventory losses and weaker spreads amidst a sharp plunge in oil prices. Its retail marketing business will also be challenging in 1H20 on lower transportation fuel demand as a consequence of the COVID-19 outbreak.

• Dragged by inventory losses. We believe 1Q20 is likely to drop QoQ, in view of weaker refining margins and potential inventory losses. Tapis Crude 211’s crack spread crashed into negative territory, falling as low as -USD3.10/bbl in early January, but has since recovered to USD6.50/bbl. However, YTD-1Q20 average of USD4.20/bbl is still much lower than 4Q19’s USD7.60/bbl and FY19’s USD6.50/bbl. 1Q20 earnings could be further marred by inventory losses as a consequence of a decline in crude oil prices. Note that crude oil prices have averaged USD53.70/bbl YTD- 1Q20, 14% lower than the average of USD62.50/bbl in 4Q19.

• COVID-19 pandemic dampening volume growth. Petron Malaysia’s total sales volume grew 2% to 36.3m in FY19. In order to gain higher market share, Petron is aiming to open c.50 new stations this year. Overall domestic volume consumption for gasoline and diesel is likely to be affected as a result of the movement control order (MCO). The Government has announced to extend the MCO till 14 Apr to contain the spread of COVID- 19.

On the other hand, we should also see a slowdown in jet fuel demand in 1H20 due to cancellation of flights. Even though the MCO could be short term, we believe social distancing will remain at least in 2H20 until the virus is contained or the discovery of a vaccine. Marketing and distribution margins could be still under pressure as competition in the retail segment remains intense, especially when competitors are ramping up their advertising & promotion (A&P) initiatives.

• Downgrade to NEUTRAL. We cut our FY20F-22F earnings by 11-17% on higher inventory losses and lower volume growth. Post earnings adjustment, our TP is lowered to MYR3.02 pegged to lower 6x FY20F P/E (from 8x), in line with -1SD from its 5-year mean. Our TP implies 0.43x FY20F P/BV, which is below its -1SD valuation of 0.7x. We downgrade the stock as we believe demand for transportation fuels in 1H20 will remain fairly weak amidst the lockdown implementation in several countries.

Source: RHB Securities Research - 26 Mar 2020