Petroliam Nasional Bhd petrol station
KUALA LUMPUR: Petronas Dagangan’s 2Q17 core net profit of RM231mil came to 47% of CIMB Equities Research’s full-year forecast, which was below expectations, but was in line with consensus.
It said on Tuesday that sales volumes declined 5% on-year, against our full-year assumption of a 1.9% on-year growth, with retail and commercial volumes falling 4% and 6%, respectively.
“The on-year profit decline was exacerbated by less-favourable retail inventory costs. We maintain Hold, but cut our dividend discount model (DDM) based target price and reduce our core EPS forecasts as we now assume a full-year contraction in sales volume,” it said.
CIMB Research said Petronas Dagangan’s RM231mil core net profit in 2Q17 was 14% lower on-year, on the back of a drop in the retail arm’s operating profit (EBIT), while the commercial EBIT was largely flat on-year.
The weaker profits at the retail segment were caused by unfavourable movements in inventory costs, despite the increase in average selling prices.
The commercial segment was unaffected by inventory costs, as selling prices are on a cost-plus basis.
The 5% contraction in sales volume was attributed to the decline in retail and commercial volumes of 4% and 6%, respectively.
“We believe this may have been caused by the expansion of the LRT network and the commencement of the Phase 1 of the MRT services from the Sungai Buloh to Semantan, as well as the weak consumer sentiment in Malaysia, that led to the fall in retail sales,” it said.
Commercial volumes fell, most likely due to Petronas Dagangan’s deliberate strategy of letting go of its lower-margin business.
Retail 2Q17 revenue rose 19% on-year, on the back of a 24% rise in selling prices for both mogas and diesel, offsetting a 4% drop in volume.
Pump prices averaged RM2.10 a litre for RON95, up 23.5% on-year. However, average cost of sales, based on MOPS prices, rose 10.8% on-year to US$63.86 a barrel, while the US$ rose by 8% on-year against the ringgit.
The average MOPS price for RON95 for the last five days of March 2017 (US$64.57/bbl) was 1.1% higher than the 2Q17 average (US$63.86), and this compared unfavourably against the year before.
Indeed, the average MOPS price for the last five days of Mar 2016 (US$54.29) was 5.8% lower than the 2Q16 average (US$57.66).
“As a result, Petronas Dagangan’s suffered from the lagged effect of higher stock costs in 2Q17.
“Petronas Dagangan’s may have to manoeuvre an increasingly challenging environment in the years to come. Petronas Dagangan’s said that it expected the retail market to remain tough, given the modest car sales growth of only 1% on-year in 1H17.
“This will be exacerbated by the improving public transportation infrastructure in Malaysia, especially after Phase 2 of the MRT line from the Semantan to Kajang station began operations from July 17, 2017. Anecdotally, we observe that traffic volumes in the Klang Valley have lightened somewhat,” it said.
CIMB Research noted that in response to these developments, Petronas Dagangan is revamping the look and feel of major Petronas stations and Kedai Mesra outlets, especially in high-volume urban areas. These efforts’ success in generating higher sales volume is the key upside risk.
On the other hand, the structural decline of the transportation fuels industry is the key downside risk. Petronas Dagangan’s efforts may or may not succeed in staving off the structural decline but as Petronas Dagangan is very profitable, it certainly has the resources to invest.
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