Results

• Within ours but above street’s estimates: 9M16 core PATAMI came at RM729.2m, making up 82% of our forecast but slightly above consensus (86%) probably due to higher than expected retail margin registered.

Deviations

• None. We expect weaker 4Q16 due to seasonality.

Dividends

• Declared an interim dividend of 14 sen/share, bringing 9M16 total dividend to 42 sen/share, 67% of our full year forecast. We expect a larger payout in 4Q16, in line with historical trend.

Highlights

• YoY, 3Q16 core net profit improved by 8.8% underpinned by (i) improvement in overall sales volume and (ii) stronger operating margins driven by better diesel margins, which was being partially offset by slightly weaker commercial operating profit on lower industry demand for commercial diesel.

• QoQ, core net profit weakened by 12.4% in 3Q16 due to slightly lower sales volume (-1%) and seasonally weaker retail operating margins in 3Q.

• In 9M16, core net profit edged up slightly by 4.5% due to (i) 1% YoY improvement in overall volume (ii) gain in retail diesel operating margins on YoY basis. This is despite the deterioration of margins in commercial diesel segment due to lower industry demand from lower E&P activities and slower fishery sectors.

• Retail will further expand its availability with Diesel Euro5 products being made available in Klang Valley starting August 2016, potentially helping the group to lift its Retail volume.

• Diesel will continue to be a drag for its Commercial segment due to weak industry demand moving forward. The group will continue to improve its margins in targeted products and market segments, leveraging on the public and private sector investment on infrastructure and construction projects.

• While Malaysia’s consumer confidence remains tepid, recent Budget 2017 with focus on improving people’s disposable income would help to mitigate the sluggishness in demand.

Forecasts

• Maintained.

Risks

• Further weakness in consumer sentiment.

• Further weakness in commercial segment operating margins.

Rating

• HOLD ↔

• While earnings remained resilient due to better inventory management, we believe volume growth would be muted due to maturity of Malaysian retail market and global economic headwinds.

Valuation

• We maintain our TP at RM23.28 based on unchanged 26x 2016E P/E.

Source: Hong Leong Investment Bank Research - 9 Nov 2016