This article first appeared in The Edge Financial Daily, on May 13, 2016.

Petronas Dagangan Bhd
(May 12, RM22.72)
Upgrade to outperform with a higher target price (TP) of RM25.40: We are upgrading Petronas Dagangan Bhd (PetDag) to “outperform” with a new TP of RM25.40 following its recent share price weakness. 

First quarter of financial year 2016 (1QFY16) earnings threw no surprises with its bottom line normalised sequentially from margins compressed in the fourth quarter of 2015 (4Q15) on Mean of Platts Singapore (MOPS) shock. 

Going forward, with crude oil prices at year’s high with a more stable price movement, earnings shock is unlikely in the upcoming 2QFY16.

All these should be good reasons enough to accumulate this index-linked stock.

PetDag reported its 1QFY16 results, which came within expectations with a net profit of RM219.4 million, accounting for 26%/25% of house/street FY16 full-year estimates. 

A 12 sen net dividend per share was declared for 1QFY16 (ex-date: May 24; payment date: June 8), which was lower than the 20 sen paid in 4QFY15, but the same as 1QFY15.

Despite revenue sliding 18% quarter-on-quarter (q-o-q) to RM4.93 billion, 1QFY16 net profit surged 138% to RM219.4 million from RM92.1 million in 4QFY15, as the preceding quarter results were hit by a sharp decline for a brief period in MOPS prices as crude oil prices plunged 30% q-o-q back then. 

In addition, 1QFY16 operating expenditure was lower by RM107.1 million on lower repair and maintenance, as well as lower staff costs.

On the other hand, the decline in top line was mainly led by a 21% contraction in the overall average selling price (ASP), but sales volume increased.

1QFY16 net profit rose 7% year-on-year from RM205.8 million in the same quarter last year, which was mainly helped by other higher income by RM27 million, due to accounting reclassification arising from the goods and services tax, as well as a higher interest income. 

Meanwhile, 1QFY16 revenue declined 19% from RM6.1 billion in 1QFY15, as the overall ASP fell 20% as MOPS decreased. This included a 12% dip in ASP for the retail segment and a 29% plunge in ASP for the commercial segment.

If prices remain at their current high levels or trend higher for the remaining quarters, 2QFY16 ASP is likely to be stronger q-o-q, which may help to boost its top line. 

Meanwhile, in view of the relatively stable movement of crude oil prices in contrast to the sharp decline during the brief period in the second half of 2014 and 4Q15, this could reduce the risk of earnings shock in the coming quarters.

We keep our FY16 to FY18 estimates unchanged for now. With the rolling over of valuation base year to calendar year 2017 (CY17) from CY16, our new TP is now raised to RM25.40, based on -0.5 standard deviation (SD) three-year moving average price-earnings ratio (PER) of 27 times, from RM24.20 previously, which was pegged to -0.5SD three-year moving average PER of 28 times. 

The share price of PetDag has fallen 11% since our last downgrade to “underperform” three months ago. Risks to our call include a drop in business volume and a sudden plunge in MOPS within a brief period of time. — Kenanga Research, May 12