TA Research said it expects Petronas Dagangan Bhd’s (PetDag) operations to be adversely affected by the Covid-19 outbreak. It anticipates PetDag’s retail volumes to decline as a result of the Movement Control Order (MCO).
It also expects PetDag’ s aviation fuel demand to slide due to travel restrictions. PetDag’s business is also likely to be impacted by lagged inventory losses following the nosedive in crude oil price on March 20, and lower income from its Kedai Mesra outlets.
“We adjust our estimates to reflect the negative impact from Covid-19 – based on our assumption that MCO stretches for 2 months,” said TA Research
It has maintained its sell call on the company with a TP of RM17.20 as it believes that weak 1H20 earnings will be a drag to PetDag. Meanwhile, beyond 1H, consumer sentiment will also be frail, given expectations of a global economic recession, as cautioned by the International Monetary Fund.
The MCO measures have severely impaired road transportation activities. Therefore, this will result in a precipitous drop in volumes for transport fuels (mogas and diesel). Accordingly, PetDag’s management expects normalisation of retail volumes to only kick in from 2H20. Furthermore, earnings contraction was exacerbated by shortened station operating hours, coupled with expected inventory lag losses.
Oil price plunged by 46% in March 9-31 due to the collapse of OPEC+ negotiations. Except for several days of uptick, the oil price plunge was largely a linear downtrend. Therefore, this likely translates to sizable inventory (current inventory days: 7-8) lag losses in 1Q20.
TA expects earnings to be weighed down by lower contribution from Kedai Mesra during MCO. This is given the slash in operating hours across its network of 700 stores.
Meanwhile, curbs on international air travel, coupled with MCO measures on border control had also led to an abrupt reduction in Jet A1 aviation fuel demand. As such, this resulted in a spike in unsold Jet A1 inventory for PetDag.
Fortunately, the group managed to sell back the inventory to Petronas’ refinery with minimal losses. However, management projects volumes for Jet A1 and commercial LPG to dip more than 20% in FY20. This is based on the assumption that Covid-19 dissipates by 2H20.
The bright spot for PetDag lies in LPG sales, which are higher overall during the MCO period. This is in spite of MCO rules for F&B outlets, which forbids dine-ins and reduced operating hours. According to management, stronger LPG volumes are attributed to higher demand from households for cooking.
Meanwhile, the ASP reduction is premised on the research firm’s new oil price forecast of US$40-60 per barrel for 2020-22. Accordingly, it has lowered 2020 ASPs for mogas/diesel/jet A1 by 19%-38% (2021: 6%-28%, 2022: 11%-18%). On the back of this, its FY20-22 forecasts were reduced by 13%-25%.
At 12.30 pm today, PetDag’s shares were traded at RM21.14, up 12 sen from Friday’s close. However, the volume traded on the shares was very thin at 19,000 shares. – April 20, 2020
