Highlights

• Retail segment: Overall volume grew 1% YoY despite weaker auto sales in FY16, indicating that consumption of retail products is more resilient than expected. In the year, the group has also enhanced its retail outlets to offer better customer experience.

• Commercial segment: Overall EBIT remain flattish YoY. Aviation margin (trending up in 2H16) is higher due to negotiating policy with its clients (airlines). However, this is being offset by weaker diesel sales due to weak O&G activities and fisheries.

• Diesel sales continue to be a drag due to weak O&G upstream activities and fisheries segment. It has also become the 1 st non-Japanese lubricant product supplier to be certified by Honda Malaysia, which is expected to further encourage its lubricant sales.

• For the overall group, depreciation cost has increased YoY due to CAPEX spent on retail outlets refurbishment and enhancement. Meanwhile, the cash OPEX for the group remains largely unchanged, mainly due to the group’s strict control on costs.

• Compared to RM227.7m CAPEX spent in 2016, the group is budgeting RM400m CAPEX for 2017, primarily focusing on outlets refurbishments. We opine that the actual CAPEX spent in 2017 would come in lower than guidance given that outlets refurbishments and upgrades would not bring about CAPEX of such magnitude. Therefore, we are forecasting RM350m CAPEX instead for FY17.

• Outlook for the petroleum product retailing industry remains murky with expected improvement of public transport network connectivity by 2018 upon completion of major MRT and LRT projects.

• Overall group volume growth is not expected exceed 2% (as seen in 2016) in our view.

Forecasts

• Unchanged.

Rating

HOLD ↔

• While earnings remain resilient due to consistent volume growth and sustainable margins, no near term catalysts are present while its improved margins appear to have been factored into the share price.

Risks

• Fluctuation in oil price.

Valuation

• We maintain our HOLD call with unchanged target price of RM25.66 based on unchanged 26x FY17 P/E. Current growth outlook appears to be insufficient to justify further valuation upgrade.

Source: Hong Leong Investment Bank Research - 23 Feb 2017