Maintain BUY and TP of MYR10.70, with 34% expected total return and pegged to 11x FY18F P/E. 1H18 core profit met our and consensus expectations from anticipation of weaker 2H18, driven by potentially lower product margins. 2Q18 core profit more than doubled YoY from stronger sales volume and interest cost savings, while QoQ growth in bottomline is more subdued at 9%, as sales volume improvement was partially negated by weaker product margins. Stock looks attractive at 6.8x FY19F P/E while 2H18 core profit could outperform if volume growth comes in stronger.

Within expectations. 2Q18 core net profit of MYR91m brought 1H18 core earnings to MYR175m, which we deem as met. We believed pressures from stronger oil prices could affect Petron Malaysia’s margins in 2H18 due to higher feedstock costs. No dividends were declared during the quarter. YoY, 2Q18 core net profit surged 132% mainly underpinned by stronger sales volume (which grew 7.1% YoY) due to gain in market share and lower financing costs. Sequentially, core PAT grew by a smaller margin due to volume growth, but being partially offset by weaker product gross margin from higher feedstock costs (crude price-driven naptha).

Weakness of earnings still within range. While admittedly earnings were weaker YoY, they had factored into our full-year earnings, which implies 35.4% drop. We believe that in the coming quarters, refining margins will remain weak due to strength in oil prices (which drives feedstock costs typically), while end product prices are expected to edge up at a slower pace. Sales volume growth is expected to be maintained at positive level (4% assumed for FY18), lending support to earnings base.

No major plant expansion in near term. In the medium term, we do not foresee Petron Malaysia making any hasty decision to embark on expansion of capacity through a new plant or upgrading the existing Port Dickson refinery. This is due to expectations of weaker refining margins in the next two years on oil price strength. On improvement works, it is acquiring an existing pipeline to relieve congestion at its product jetty at Port Dickson and has started the design for a new Diesel Hydroeater (DHT) to comply with Euro 5 standards by 2020. This is in line with the Government’s policy for compliance for its diesel product.

Maintain BUY. We maintain our forecasts and TP of MYR10.70, pegged to 11x FY18F forward P/E. We do not discount the possibility of stronger-than expected earnings in 2H18 due to sustained strong sales volume growth, which would be a positive catalyst. Valuations remained attractive at 6.8x FY19F P/E. Risks to our call include a drop in product margins and change in government fuel subsidy policy.

Source: RHB Securities Research - 30 Aug 2018