This article first appeared in The Edge Financial Daily, on November 11, 2015.

Petronas Dagangan Bhd
Nov 9 (RM23.14)
Maintain hold with a target price (TP) of RM23.85: We raised financial year 2015 to 2017 forecast (FY15F to FY17F) earnings by 12% to 17%, after imputing for higher unit gross profit and lower operational expenditure (opex). Petronas Dagangan’s (PetDag) recent third quarter financial year 2015 (3QFY15) results beat expectations by a wide margin, driven by higher unit gross profit from better inventory management and lower opex from better cost control. 

There is a direct relationship between global oil price movements and PetDag’s earnings, as seen in gains/losses on the group’s inventory of retail petroleum products due to fluctuations in oil prices.  A sharp fall in the oil price within a short period of time will lead to retail inventory losses and margin compression, and vice versa. 

However, with crude prices at the current low levels, the risks that PetDag will report severe inventory losses (that was seen in 4Q14) are low, as a similar percentage decline in oil prices, will only translate into a small loss, in absolute dollar value. Given the challenging operating environment, PetDag has moderated its expansion to 20 stations per annum (pa) (from 50pa). It also has undertaken various measures to keep opex at RM300 million to RM320 million per quarter, leading to a 12% year-on-year (y-o-y) decline in opex in the nine months of 2015 (9M15). 

This is in addition to the periodic upsurge in oil prices seen in the first half of 2015, which should take FY15F earnings higher y-o-y. We expect unit gross profit to increase 16% to 14.1 sen in FY15F, and opex to fall 11%, paving the way for net profit to grow by 70% in the year. 

Our “hold” rating for PetDag is premised on a limited upside to our TP of RM23.85, which is pegged to 28 times FY16F earnings, its five-year mean historical price-earnings valuation. Among the key risks to our view are that falling oil prices could lead to margin compression. — Alliance DBS, Nov 9