Petron Malaysia's 9MFY24 results missed forecast due to persistently weak crack spreads impacted by concerns over Saudi Aramco's increased production. Looking ahead, Kenanga Investment Bank expects refining margins to remain under pressure from declining demand due to the adoption of EVs and excess refining capacity. The house has cut the FY24F earnings by 44% but maintains its TP of RM4.15 with MARKET PERFORM call.

The 9MFY24 net profit of RM87.6m disappointed coming in at only 49% of full-year forecast, Kenanga said. The variance against forecast came largely from its weaker-than-expected crack spreads. YoY, its 9MFY24 revenue was flattish due to higher sales volume of 28m barrels (+2%) driven by jet fuel sales and liquified petroleum gas but partially offset by lower ASPs. Its net profit shrank 62%, no thanks to weaker crack spreads, which were influenced by concerns over Saudi Aramco's decision to increase production to regain market share.

QoQ, similarly, its 3QFY24 net profit plunged 65% dragged by lower ASP and weak refining margins. The house cuts its FY24F earnings by 44% to reflect lower assumptions for spreads while maintaining our FY25F numbers.

Kenanga however maintains its TP of RM4.15 based on an unchanged 5x FY25F PER, in line with the average valuation of its closest peer HENGYUAN (Not Rated). The ascribed valuation benchmark it added is also broadly in line with its listed global peers such as TOA Oil, Phillips 66, HF Sinclair, Valero, Marathon Petroleum.

As for outlook, the house expects regional crack spreads to remain unfavourable over the immediate term given the increased availability of refining capacity in the market with refineries coming back online after the recent maintenance cycle, coupled with weak demand for refined products amid a soft global economy. Over the longer term, the transition to renewable energy, particularly the adoption of EVs will result in a structural decline in the demand for refined products. In our local front, the government will begin cutting fuel subsidies to bolster its fiscal position, starting with diesel, thereby expediting the adoption of EVs.

On a brighter note, Kenanga said easing geopolitical tensions are anticipated to lead to more stable crude prices, thereby contributing to earnings stability. Maintain MARKET PERFORM.