Petronas Dagangan Bhd
(Aug 7, RM21.28)
Maintain hold with a target price (TP) of RM21.14: Petronas Dagangan Bhd’s (PetDag) second quarter of financial year 2015 (2QFY15) revenue rebounded 6.4% quarter-on-quarter (q-o-q) due to its increase in average selling price by 5% and sales volume by 2%. 

Q-o-q earnings before interest and tax (Ebit) margin continue to improve from 4.7% to 5.8% mainly due to higher gross profit as a result of a rebound in Mean of Platts Singapore price in 2QFY15, which was in tandem with the rise in oil price (up 16% q-o-q); and lower operating expenditure (opex) arising from the cost reduction effort. 

To note, in the second quarter of 2009 (2Q09), oil price rebounded 31% q-o-q and PetDag achieved a 5.8% Ebit margin in the quarter due to lower inventory costs.

First half 2015 (1H15) opex was lower by RM107 million, in line with the company’s effort to cut cost with a target to reduce the opex by 15% in FY15.

Despite strong 2QFY15 results, we expect weaker third quarter (3Q) results as the Brent oil price has dropped by 23% since the end of June 2015. The uncertainty in crude oil price movement due to the impact of the lifting of sanctions against Iran and continued production increase from the Organization of the Petroleum Exporting Countries (Opec) fail to provide margin visibility near term.

PetDag is trading at a premium valuation of 31 times FY15 price-earnings ratio (PER) and 26 times FY16 PER. However, this is in line with Nestle (Malaysia) Bhd’s valuation, which currently trades at 27 times FY16 PER given that both also focus on consumer products. 

Earnings forecasts remain unchanged pending analysts’ briefing.

We maintain our “hold call” and TP of RM21.14 based on 26 times FY16 PER (in line with historical average PER) with a projected dividend yield of 2.7%. — Hong Leong Investment Bank, Aug 7.

This article first appeared in digitaledge Daily, on August 10, 2015.