Petdag’s FY18 core net profit of RM855m fell below expectations on weaker than expected margins. Core net profit dropped by 21% in FY18 on both retail and commercial segments. Cut FY19-20 earnings by 9% after imputing higher advertising & promotion cost as well as repair & maintenance cost for refurbishment activities. Maintain HOLD rating with lower TP of RM24.40 pegged to unchanged 24x FY19 PER.

Below expectations. FY18 core net profit of RM854.9m (-21% YoY) fell below our/consensus expectations at 84%/83% of full year estimates. The negative deviation largely stemmed from weaker than expected margins as a result of higher opex and declining MOPS.

Dividends. Declared fourth interim dividend of 25 sen/share (ex-date: 11 Mar; payment date: 13 Mar), bringing its YTD DPS to 70 sen.

QoQ: Core net profit dropped by 83% QoQ to RM50m mainly due to weaker margins as a result of increase in professional services and declining MOPS prices trend. This was cushioned by stronger sales volume for commercial segment (+4%).

YoY: Core net profit also decreased by 81% largely attributable to weaker retail division which posted RM40.8m losses (from RM226.1m profit in 4Q17) as a consequence of declining MOPS prices and higher LPG costs.

YTD: FY18 core net profit decreased by 21% from RM1.01bn in FY17 no thanks to weaker retail segment (-29%; higher product cost & operating cost) and commercial segment (-7%; lower margins led by poorer product mix).

Unexciting volume growth. Retail sales volume grew 0.5% while commercial sales volume dropped 1% in FY18. Moving forward, we do not expect retail volume to grow strongly amidst fierce competition. It might be further capped by government initiatives to promote public transport with RM100 unlimited public transport passes on the RapidKL which kick started in Jan-19.

Focusing on non-fuel income. Petdag continues its strategy of growing non-fuel income to 30% of its total revenue (from existing level of <10%) in the long run. However, management has yet to disclose any details of the upcoming project. One of the key initiatives is the release of new E-wallet, SETEL which is integrated with its Mesra program in order to provide better fuelling and purchasing experiences at the petrol stations.

Forecast. Cut FY19/20 earnings by 9% after factoring higher advertising & promotion cost as well as repair & maintenance cost for refurbishment activities.

Maintain HOLD with lower TP: RM24.40. Maintain HOLD with lower TP of RM24.40 (from RM26.70) after earnings forecast adjustment peg to unchanged 24x FY19 PE.

Source: Hong Leong Investment Bank Research - 27 Feb 2019