Results

• Above Expectation: 3QFY15 PATAMI surged by 36% YoY bringing 9MFY15 PATAMI to RM698m, making up 102% and 87% of HLIB and consensus full-year estimates respectively.

Deviations

• Mainly due to better than expected margin arising from better inventory management.

Dividends

• Declared an interim dividend of 14 sen per share bringing 9M15 total dividend to 40 sen versus our full year forecast of 63 sen per share.

Highlights

• 3QFY15 revenue fell by 21% YoY mainly due to decrease in average selling price by 18% coupled with a decrease in sales volume by 3%. YoY, EBIT margin surged from 2.8% to 4.6 mainly due to: i) higher gross profit as a result of rebound in Mean of Platts Singapore (MOPS) price; and ii ) lower opex arising from cost reduction effort.

• QoQ, despite Brent crude oil fell 19%, EBIT margin only decrease slightly from 5.8% to 4.6% mainly due to better inventory management (has reduced from 8-9 days to 5- days) which helped to cushion impact from volatile oil price environment.

• Both 9M15 retail and commercial registered lower revenue YoY, but EBIT increased YoY mainly due to lower opex. 9M15 opex was lower by RM123m mainly due to lower advertising, promotion expenses and other cost reduction efforts undertaken by Petdag. We believe the company is on track to achieve its full year target to reduced opex by 15%.

• PetDag is trading at premium valuation of 25x FY15 P/E and 24.7x FY16 P/E. However, this is in line with Nestle’s valuation which currently trades at 26x FY16 P/E given both also focus on consumer products.

Forecasts

• FY15 and FY16 earnings were raised by 32% and 12% respectively after we factored in higher margin arising from better inventory management.

Catalysts

• Oil price stability which 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 with target price raised from RM21.14 to RM23.67 based on unchanged 26x FY16 P/E post earnings upgrade.

Source: Hong Leong Investment Bank Research - 3 Nov 2015