We recently met up with Petdag’s management. Positive impact of the improvement in product margin has been reflected and normalization of margin in is expected in FY18 due to flattish oil price movement. Gasoline volume is expected to stay flat due to improved public transport, stagnant auto TIV, e hailing services and better auto fuel efficiency. In the long run, Petdag believes that the deregulation of the product retailing industry is imminent and its main objective is to improve its cost efficiency in order to sustain profit growth. Maintain forecast and HOLD rating with unchanged TP of RM24.64 pegged to 24x FY18 PER.

Below are the key takeaways from our recent meeting with Petdag’s management.

Gasoline price outlook. Petdag has been benefited from upward trend of MOPS pricing in FY16-17. However, we opine that the trend will normalize downwards in 2018 due to expectation of flattish oil price movement. Our oil price target for 2018 is US$55-65/bbl as we opine that any significant surge of oil price will be capped by increase in shale oil production while on the other hand oil price is till supported by OPEC’s production cut which we expect will be extend for another year.

Volume outlook. Going forward, we expect retail volume to stay flattish due to (i) stagnant auto total industry volume, (ii) improved public transport in Klang Valley, (iii) growing popularity of e-hailing services and (iv) improvement in fuel efficiency of cars in general due to green initiatives.

Capex. Going forward we understand that capex for the group will normalize back to the RM300m-400m range. Most of the capex budgeted for FY18 will focus on boasting retail volume by major upgrade spending on existing stations.

Expansion plan. We understand that 3 new Mesra stations were added in FY17 and the group is targeting to open 10 new Mesra stations in FY18. Going forward, we expect management to focus more on upgrading existing stations rather than embark on aggressive expansion plan due to market saturation.

Commercial. Commercial segment will continue to experience higher growth thanks to the group’s focus on higher value aviation and diesel segment. The group is focusing on bringing in more clients especially smaller airlines in the aviation segment.

Deregulation. In the long run, Petdag believes that the deregulation of the product retailing industry is imminent and its main objective is to improve its cost efficiency in order to sustain profit growth.

Forecast. Maintained

Maintain HOLD, TP: RM24.64. Positive impact of the improvement in product margin has been reflected and normalization of margin in FY18 and muted outlook for gasoline volume has made its long term prospects less appealing. Maintain HOLD with unchanged TP of RM24.64 pegged to 24x FY18 P/E.

Source: Hong Leong Investment Bank Research - 10 Apr 2018