Overall volume increased 3% YoY due to growth in commercial and LPG volume, partially offset by 3% decline in retail volume. LPG segment margin was hit by higher production of cylinders and we expect margin to normalize in subsequent quarters. Retail market is anticipated to be competitive as car sales have continued to decline since 2015, coupled with increasing number of energy efficient vehicles as well as the rise in usage of public transportation and e-hailing services. Maintain forecast. Maintain HOLD with unchanged TP of RM23.03 pegged to 24x FY19 PER.

YoY: Overall volume increased 3% in 1Q18. This was primarily driven by 8% growth in commercial volume contributed by fuel oil and sulphur from higher bunker sales. LPG volume also grew 6% following the implementation of new incentive programmes as well as higher demand from major customers. This was partially offset by 3% decline in retail volume due to market de-growth and station closures. As at end of 1Q18, there were 37 stations closed for upgrading purpose.

QoQ: Overall group sales volume decreased by 4%. This was mainly due to lower volume from retail, commercial and lubricant segments, partially offset by 2% volume growth in LPG segment.

LPG: LPG segment margin was hit by higher production of cylinders. We understand that management choose to expense off the production costs instead of capitalizing due to difficulty in locating the exact location of the cylinders. Hence we expect the margin from this segment normalize in subsequent quarters.

Inventory build-up: Inventories increased by 16% qoq mainly due to inventory build up in preparation for scheduled refinery turnaround. The inventory level should normalize in subsequent quarters.

Retail: Retail market is anticipated to be competitive as car sales have continued to decline since 2015, coupled with increasing number of energy efficient vehicles as well as the rise in usage of public transportation and e-hailing services.

Fixed pump prices: Management indicated that MOGAS volume has slightly increased over the past few weeks ever since the retail petrol prices had been fixed but it is still too early to tell whether the increase in volume is sustainable.

Forecast. Maintained

Maintain HOLD, TP: RM23.03. Maintained HOLD with unchanged TP of RM23.03. TP is pegged to unchanged 24x FY19 PER.

Source: Hong Leong Investment Bank Research - 22 May 2018