Highlights

• YoY: Overall volume increased 3% in 3Q17. This was primarily driven by the 11% surge in commercial volume contributed by stronger aviation, diesel and fuel oil volume due to effective marketing strategies and new aviation contracts signed. LPG volume also grew 5% due to higher demand. Partially offsetting the commercial volume increase was the 5% decline in retail volume due to upgrading of diesel clients to commercial and slower demand for gasoline.

• QoQ: Overall group sales volume grew 7%. The growth mainly came from 16% growth of the commercial volume due to seasonality and stronger demand. In addition, LPG volume has also improved 6%. Retail volume has weakened slightly by 1%.

• The group is still underspending its cash on bal ance sheet in 9M17 with only RM23.4m spent in contrast to RM351.5m approved CAPEX budget allocated by the group. We understand the group’s intention to spend with care amid slowing retail business amid subdued car sales and tepid demand for gasoline. Aggressive spending on refurbishment of existing petrol stations would not bring in significant accretive sales to the group.

• Retail volume growth would still remain tepid due to slower demand for gasoline in light of commencement MRT station since mid-2017 and improvement in fuel efficiency of cars in general due to green initiatives.

• Its favourable product margins for diesel products would be sustained in 4Q17. However, we expect the margins to normalize downwards in 2018 as we expect flattish movement in MOPS pricing due to expectation of flattish oil price movement.

• Commercial segment will continue to experience higher growth thanks to the group’s focus on higher value Aviation and Diesel segment.

Forecasts

• Unchanged.

Risks

• Fluctuation in oil price.

• Weak demand of gasoline product.

Rating

• HOLD

• Post our upgrade yesterday, share price has surged 10% and we believe it has priced in the positive impact of the improvement in product margin. Normalization of margin in 2018 and muted outlook for gasoline volume has made its long term prospects less appealing

Valuation

• We maintain TP at RM24.64 based on unchanged 24x FY18 PER.

Source: Hong Leong Investment Bank Research - 14 Nov 2017