This article first appeared in The Edge Financial Daily on November 29, 2018
Petronas Dagangan Bhd
(Nov 28, RM26.46)
Downgrade to reduce with a lower target price (TP) of RM24.27: Petronas Dagangan Bhd’s (PetDag) third quarter of financial year 2018 (3QFY18) core net profit of RM279 million was 16.5% lower year-on-year (y-o-y) on account of higher advertising and promotion costs, higher staff wages, lower sales volume (-3% y-o-y), and what we believe to be a lower quantum of lagged inventory gains compared with 3QFY17.
Revenues, however, were up due to higher average selling prices, which more than offset the lower sales volume. Average 3QFY18 commercial selling prices were up 31% y-o-y on the back of strong Mean of Platts Straits (MOPS) prices, but average retail selling prices were up only 7% y-o-y, constrained by the pump prices of RON95 and diesel, which have been fixed at RM2.20 per litre and RM2.18 per litre, respectively, since March 22, 2018.
For nine months of FY18 (9MFY18), core net profit was relatively flattish, with the sales volume decline of 1% y-o-y and higher advertising and staff costs more than offset by lagged inventory gains in the retail segment arising from a steady increase in MOPS prices.
PetDag reported 3QFY18 volumes that were 5% quarter-on-quarter (q-o-q) higher than 2QFY18, with retail volumes up 3% and commercial volumes up 7% q-o-q. Retail volumes grew q-o-q due to higher car sales during the tax-free period between June 1 and Aug 30, 2018, and due to the higher price of commercial diesel, which incentivised a switch to retail diesel.
The q-o-q growth in commercial volumes was probably due to the higher volume of jet fuel sales in the peak summer months, partially offset by lower diesel sales.
Retail volumes in 3QFY18 rose 2% y-o-y, the first y-o-y increase in six quarters, while commercial volumes fell 8% y-o-y on lower jet fuel sales as airlines rationalised capacity and as commercial diesel sales were partially displaced by retail diesel sales.
The steep fall in MOPS prices since early October 2018 implies lagged inventory losses in 4QFY18 forecast (4QFY18F) , reversing (in whole or in part) the lagged inventory gains of 9MFY18. From 2QFY19F, the government plans to limit the retail subsidies for RON95 to a narrower group of people and with clear volume limits, possibly hurting PetDag’s retail sales.
The new aviation levy on departing air passengers from June 1, 2019F may hurt airline profitability, potentially leading to capacity cuts and lower jet fuel demand. Separately, investors have been anticipating a special dividend payout from Petroliam Nasional Bhd (Petronas) subsidiaries since the government asked Petronas to pay a RM30 billion special dividend. Petronas Chemicals told analysts it will not pay special dividends, hence we believe PetDag is unlikely to do so as well. Key upside risk is stronger non-fuel income growth from various initiatives. — CGSCIMB Research, Nov 28.