Friday 29 Mar 2024
By
main news image

Petronas Dagangan Bhd
(Nov 5, RM19.94)
Maintain fully valued with target price (TP) of RM18:
Petronas Dagangan Bhd (PDB) booked RM160.4 million in net profit in the third quarter of financial year 2014 (3QFY14) (down 29% year-on-year [y-o-y], down 14% quarter-on-quarter [q-o-q]), taking the nine-month (9MFY14) profit to only RM501 million (down 24% y-o-y). This is below our and consensus expectations.

Earnings were dragged by: (1) higher product cost due to unfavourable timing differences with the Mean of Platts Singapore (MOPS) prices, and (2) higher operating expenditure (opex) arising from the group’s aggressive expansion plan.

Its retail segment posted a lower operating profit of RM98 million in 3QFY14 (down 56% y-o-y, down 32% q-o-q) due to higher product costs arising from the unfavourable timing differences with MOPS prices.

The latter is used to compute the subsidies receivable by PDB, and falling oil prices in 3Q would have reduced the subsidies received. The subsidies are normally netted off the cost of goods sold in the income statement.

Retail revenue was healthy in 3QFY14, growing 5% y-o-y driven by higher average selling price (ASP) and sales volume for motor gas (up 3% y-o-y).

Commercial revenue fell 8% y-o-y to RM4.28 billion in 3QFY14 due to lower sales volume (down 6%) and lower ASP (down 2%).

Despite this, segmental operating profit surged to RM133 million (up 47% y-o-y, up 37% q-o-q). This was mainly driven by higher gross margin as a result of lower oil prices (ASP fell only 2% y-o-y but Brent prices fell 16%), and lower opex (down RM14.6 million y-o-y).

With oil prices set to continue to fall in 4Q, PDB’s retail segment profit might continue to be pressured by unfavourable timing differences with MOPS prices.

Meanwhile, the government remains committed to the subsidy rationalisation programme with a new scheme expected to come into effect in mid-2015.

The potential withdrawal/reduction of subsidies for certain segments of the population could reduce demand for motor gas.

PDB’s commercial segment could see a drop in aviation fuel sales (67% market share in Malaysia) next year, when Malaysian Airline System Bhd (MAS) starts the restructuring process. Aircraft movement at the Kuala Lumpur International Airport Main Terminal Building dropped by 7% y-o-y in 3QFY14.

Expectations are for MAS to rationalise capacity further, which will continue to dampen demand for aviation fuel.

We retain our “fully valued” rating on PDB with a TP of RM18 pending the analyst briefing, as we see limited catalysts amid earnings risks. Valuation is also expensive at 25 times for FY15F price-to-earnings ratio.

Retail margins may be pressured as crude prices continue to trend down. Product costs would remain high as falling oil prices would lead to unfavourable timing differences with MOPS prices.

Management remains committed to expanding its network by 20 to 30 outlets annually. We concur with the management that this would benefit the group in the long run, but the aggressive expansion plan could drive up opex and start-up losses. There will be concerns about the sustainability of margins. — Alliance DBS Research Sdn Bhd, Nov 5

Petronas-Dagangan_theedgemarkets

This article first appeared in The Edge Financial Daily, on November 6, 2014.

      Print
      Text Size
      Share