Petronas Dagangan Bhd
(Feb 18, RM18.80)
Upgraded to hold with a lower target price (TP) of RM17.70. Our RM17.70 TP is based on 27 times forecasted financial year ending Dec 31, 2015 (FY15F) earnings per share (EPS), which is its five-year average price-to-earnings ratio (PER).

We are cutting our FY15F/FY16F earnings by 19% each, after adjusting for lower unit gross profit and sales volume assumptions.

We think Petronas Dagangan Bhd has seen its worst in its fourth financial quarter ended Dec 31, 2014 (4QFY14). 

Despite the 35-sen and 20-sen retail price cut in January and February respectively, the actual impact will be minimal as Petronas Dagangan’s actual selling price (after duty) tracks Means of Platts Singapore (MOPS) prices, which stabilised in the last two weeks of January. 

Meanwhile, dividend payments should hold up well, given the group’s large cash pile (RM1.84 billion).

Petronas Dagangan’s retail segment’s margins suffered, due to the steep fall in global oil prices in 4QFY14. 

This is because the government levies a duty on the group, which is calculated based on difference between the selling price and average MOPS price for the month. 

This effectively tags the group’s actual selling price for the retail products to global oil prices, which fell significantly in 4QFY14.

4QFY14 retail sales volume declined by 12% year-on-year (y-o-y), mainly due to disruption from the floods along the east coast of Peninsular Malaysia and increased regulatory enforcement which curbed diesel sales in the border states. 

Commercial sales volume also fell by 8% y-o-y, due to lower diesel, aviation fuel and bunker fuel sales. — AllianceDBS Research, Feb 16

This article first appeared in The Edge Financial Daily, on February 23, 2015.