Highlights

• Following are the salient points from analyst briefing yesterday.

• Overall group sales volume was up by 1% YoY and 4% QoQ, contributed by marginal growth in Retail segment amid weak LPG volume.

• Retail volume inched up by 2% YoY due to stronger motor gasoline volume (particularly Ron 95), showcasing its retail branding visibility in the media. Nevertheless, diesel volume continued its downtrend in 1Q16 consistent with overall negative diesel volume growth in the industry.

• Commercial volume was flattish YoY due to weaker overall volume growth. During the quarter, Upstream and Fisheries subsegment contributed to the weakness in commercial diesel volume, albeit being partially offset by positive growth YoY of other segments on diesel sales. Moreover, fuel oil showed YoY uptick in volume due to contract secured from TNB tenders.

• LPG volume was weak with volume down by 5% YoY in conjunction with the slowdown in automotive industry as more customers have switched to the subsidized natural gas alternative. Meanwhile, positive growth from the household LPG segment is not sufficient to offset the drop in volume.

• Lubricant division is the outperformer in the quarter with 16% YoY registered, primarily due to robust demand from OEM clients (i.e. Perodua, Naza and etc). Uptick in demand was also seen from clients involved in the plantation and marine businesses. RAPID developments have also caused higher demand for machinery lubricants.

• Record high cash balances were seen at RM2.4bn as of end of 1Q16. However, the cash balances should normalize to RM1.6- 1.7bn level upon completion of its loan repayment in April and is expected to be sustained at that level throughout the year.

• All in, we believe the group’s sales volume growth would continue to be slow amid still weak consumer sentiment. However, we take comfort in the company’s strategy to cap inventory days to 4 days (in contrast to 9-10 days before 2015) to reduce volatility in its earnings caused by vagaries in the oil prices. YoY growth would still be seen in the company but would not be sufficient to justify a rerating.

Forecasts

• Unchanged.

Catalysts

• Oil price stability which will provide margin visibility.

• Higher dividend payout.

• Continued cost rationalisation

Risks

• Fluctuation in oil price.

Valuation

• We maintain our HOLD call with unchanged target price of RM23.28 based on unchanged 26x FY16 P/E. Current growth outlook appears to be insufficient to justify further valuation upgrade.

Source: Hong Leong Investment Bank Research - 13 May 2016