Petronas Dagangan Bhd
(May 21, RM26.20)
Cut to market perform with a lower target price (TP) of RM25.50: Petronas Dagangan Bhd (Petdag) reported its lowest quarterly earnings in two years, owing to higher product costs coupled with sliding sales volumes. However, we still expect volume to grow by 1% in financial year ended 2018 (FY18) as a fixed or cheaper fuel price should encourage traffic flow. We also see the reversal to old subsidy system having a neutral impact to Petdag. Given the disappointing 1QFY18 and 9% year-to-date (YTD) price appreciation, we cut Petdag to “market perform” with a revised target price of RM25.50.
First quarter in 2018 (1QFY18) core profit of RM210.9m plunged 24% sequentially from RM279.3m in fourth quarter in 2017 (4QFY17) despite revenue inching up by 1% to RM7.07 billion from RM6.99 billion previously. This was principally owing to higher product costs, especially for retail segment, which saw its operating margin deteriorating to 4.5% from 6.3% previously while commercial segment’s margin fell slightly to 3.5% from 3.6%. Overall, the group’s operating margin fell to 4.1% from 5.3% previously. On the other hand, the rise in revenue was led by higher average selling price (ASP) which firmed up 3% although sale volume was lowered by 4%.
Year-on-year, first quarter in 2018 (1QFY18) core profit contracted 17% from RM252.8m although revenue rose 6% from RM6.69 billion. This was led by the above-mentioned decline in retail earnings on higher product costs, which resulted in segment operating margin falling from 5.6% to 4.5%. However, this was mitigated by higher mogas margin on lower product cost. In addition, operating expenditures (opex) was higher in 1Q18 due to higher salaries, wages and benefit expense. On the other hand, commercial reported lower earnings on higher opex. Overall, retail saw 2% decline in sales volume while commercial posted higher revenue on higher average selling price and volume growth.
The new Pakatan Harapan government decided to maintain fuel prices since it won the 14th general election (GE14) on 9 May as opposed to the previous weekly review every Wednesday. The new prime minister said that the government will subsidise whenever costs are higher than selling price. This means it will revert to the old system which was implemented prior to December 2014. Nonetheless, the new measure has neutral impact to Petdag’s earnings but may affect it cash-flow given the timing to claim back the refund. With its current cash in hand of RM2.69 billion, Petdag should have enough financial strength to facilitate the change. On the other hand, a fixed or cheaper fuel price may encourage traffic flow which is good for sales volumes.
In view of the disappointing 1QFY18 results, we trimmed financial year 2018 estimates and 2019E by 13% and 9% as we adjust: (i) volume growth to 1% and 1% from 2% and 1%, and (ii) operating margin to 4.99% and 5.23% from 5.65% and 5.65%. Post earnings revision, we cut target price to RM25.50 from RM27.85 on higher 3-year moving average of 22.9 times calendar year 2019 price-earnings-ratio (PER) of from 22.1 times previously. We also downgrade the stock to “market perform” and “outperform” as we believe most positives have been priced in following its share price run-up of 9% year to date. Our recommendation is supported by a decent dividend yield of 3%. Risks to our downgrading include better-than-expected business volume and significant improvement in profit margins. — Kenanga Research, May 21