PETRONM’s 9MFY23 results beat our expectation on improved crack spreads in 3QFY23. Nonetheless, its 9MFY23 core net profit still eased 28% YoY as narrower crack spreads more than offset an improved sales volume. We raise our FY23-24F earnings forecasts by 6% and 2%, respectively, lift our TP by 2% to RM4.74 (from RM4.65) but maintain our MARKET PERFORM call as we are cautious on the outlook for refining spreads.

Above expectation. Its 9MFY23 net profit of beat our expectation at 82% of our full-year forecast (consensus estimate is unavailable as we are the only research house covering the stock in the market). The key variance against our forecast came largely from a higher-than-expected sales volume.

Results’ highlights. YoY, its 9MFY23 revenue dropped 10% due to lower oil prices which more than offset a higher sales volume of 27.6m barrels (+10%). Its net profit plunged by a steeper 28% we believe as the crack spreads narrowed, and coupled with the absence tax incentives.

QoQ, its 3QFY23 revenue rose 20% mainly due to a 3% rise in its sales volume and higher oil prices. However, its net profit more than doubled as crack spreads widened, partially offset by losses from derivatives (vs. gains previously).

Forecasts. We raise our FY23-24F net profit forecasts by 6% and 2%, respectively, to reflect higher sales volumes.

Consequently, we raise our TP by 2% to RM4.74 (from RM4.65) based on unchanged 5x FY24F PER, in line with average valuation of its closest peer HENGYUAN. Our ascribed valuation is also broadly in line with some of its other listed global refinery peers (e.g. TOA Oil, Phillips 66, HF Sinclair, Valero, Marathon Petroleum). Note that our TP reflects our in-house ESG rating of 2-star (see Page 4), which we attach a 5% discount to our initial valuation.

Outlook. We are cautious on the outlook for refining spreads given ample refining capacity in the market (with refineries coming back online after a recent maintenance peak cycle) coupled with softening demand for refined products on a slowing global economy. Over the longer term, the adoption of EVs will also bring about a structural decline in demand for refined products. As such, we maintain MARKET PERFORM for PETRONM.

Risks to our call include: (i) possible recession dampening demand of petroleum products, (ii) sudden plunge in crude oil prices, and (iii) operational hazards (e.g. fire) that might disrupt capacity utilisation rate.

Source: Kenanga Research - 24 Nov 2023