Highlights

• Following are the salient points from analyst briefing last Friday.

• Overall group 1H15 sales volume was lowered by 6% YoY mainly due to lower retail volume (-11% YoY). This is due to diesel demand has shifted from retail to commercial arising from narrowing price gap after implementation of managed float pricing system in Dec14. Sales volume for commercial segment decreased slightly by 0.4% YoY mainly due to lower sales for fuel oil offset by higher diesel and bitumen volume.

• 1H15 sales volume for LPG was lowered by 3% YoY due to lower volume for household segment despite bulk LPG volume has increased. We also gathered that cost components (marketing, distribution, dealer commission and alpha per MT) for LPG were revised upward under the APM model with effect from 1 June 15. However, this will have limited impact due to rising importing cost.

• PetDag has managed to reduce opex by circa RM100m in 1H15 and on track to achieve its full year target to reduced opex by 15%. In addition, inventory days have been reduced from average 8-9 days to 5-6 days which will help to cushion impact from volatile oil price movement.

• In 2Q15, Petdag has opened 6 new petrol stations bringing 1H15 total new stations to 13 (versus full year target of 20-30 stations).

• Despite strong 2QFY15 result, we expect weaker 3Q result as Brent oil price has dropped by 23% since end of June 15. The uncertainty in crude oil price movement due to impact of the lifting of sanctions against Iran and continue production increased from OPEC fail to provide margin visibility in near term.

Forecasts

• Unchanged.

Catalysts

• Oil price stability will provide margin visibility.

• Successfully expansion at oversea markets.

• Higher dividend payout.

Risks

• Fluctuation in oil price.
• Cost escalation due to aggressive expansion plan.

Valuation

• We maintain our HOLD call and target price of RM21.14 based on 26x FY16 P/E (in line with historical average P/E) with projected dividend yield of 2.2%.

Source: Hong Leong Investment Bank Research - 10 Aug 2015