Overall volume improved by 3% YoY in 1Q9 due to 1% increase in commercial segment and 6% growth in retail volume. Management indicated that they will undergo stringent review on their capex spending to ensure maximum capital utilisation. Meanwhile, revision of dealer’s commission will have no impact to Petdag as their margin remains fixed at 5sen/litre for MOGAS and 2.2sen/litre for diesel. With no changes in our estimates, we reiterate HOLD recommendation on the counter with unchanged TP of RM24.40 pegged to 24x FY19 PER.

Healthy volume growth in 1Q19: Overall volume increased by 3% in 1Q19. This was primarily underpinned by 6% growth in retail sales and 1% growth in commercial segment. The strong retail growth was mainly due to higher number of operating stations including two newly opened stations and introduction of the new PETRONAS PRIMAX 95 with Pro-Drive during the quarter. Management remains cautious over this segment as higher car sales do not necessarily translate into higher fuel demand due to better energy efficiency. Meanwhile, limited information is available on the implementation of targeted fuel subsidy but it could kick in soonest by August this year.

Opex could stay elevated. While management will continue to pursue cost optimisation on general expenses, marketing and promotional expenses coupled with expenses incurred for digitalisation initiatives will likely increase in order to spur higher volume. Therefore, we believe overall opex will be flat at best or possibly higher this year.

Capex guidance. Petdag has incurred RM64m capex in 1Q19 and bulk of it is the continuous refurbishments and upgrades for Mesra shops. Despite having outstanding capital commitment of RM537.8m including the approved and contracted for as well as approved but not contracted for as of end-1Q19, management indicated that they will undergo stringent review on their capex spending to ensure maximum capital utilisation. This would suggest that they may slow down some of its asset refurbishment activities. Having said that, the aims of expanding 10-15 new stations this year and digitalisation transformation remain intact. Therefore, we are keeping our capex assumption of RM400m/annum in FY19-20.

Revision of dealer’s commission. Recall that the government has made its first revision since 2008, increasing dealer’s commission by 3 sen for MOGAS and diesel this year under automatic price mechanism (APM) model. While this will increase dealers’ earnings, impact to Petdag is neutral as Petdag’s margin remains fixed at 5sen/litre for mogas and 2.2sen/litre for diesel. Accounting wise, the additional cost which is recognised in opex level is offset with equivalent higher revenue.

Forecast. Maintained as the briefing yielded no major surprises.

Maintain HOLD, TP: RM24.40. Maintained HOLD with unchanged TP of RM24.40. TP is pegged to unchanged 24x FY19 PER.

Source: Hong Leong Investment Bank Research - 30 May 2019