1H19 core net profit of RM446m (-14% YoY) came below our/consensus expectations at 44%/43% of full year estimates dragged by higher depreciation charge and operating expenses. Both retail and commercial sales volume continued to demonstrate positive YoY growth of 7% and 9% respectively in 2Q19 (vs +6% and +1% in 1Q19). Following that, we slashed our FY19/20/21 earnings estimates by 10%/7%/1% respectively. Maintain HOLD with lower TP of RM23.01 (from RM24.40) peg to 24x FY20 P/E.

Below expectations. 2Q19 core net profit of RM174.7m (-36% QoQ, -43% YoY) brings 1H19’s total core net profit to RM445.6m (-14% YoY). At 44%/43% of our/consensus full year estimates, it came below expectations dragged by higher than expected operating expenses and depreciation charge.

Dividends. Declared second interim dividend of 14 sen/share (ex-date: 10 Sep; payment date: 20 Sep), which is lower than 2Q18’s 16 sen/share, bringing 1H19 DPS to 29 sen/share (vs 29 sen/share in 1H18).

QoQ: Core net profit plunged by 36% QoQ to RM174.7m mainly due to weaker margins as a result of declined MOPS prices trend despite revenue increased by 7% with the help of of higher ASPs (+4%) and sales volume (+3%). It was further marred by higher depreciation charge (+11%).

YoY: Core net profit also fell by 43% largely attributable to weaker contribution from both retail segment and commercial segments as a consequence of decreased MOPS prices trend, higher advertising and promotion expenses as well as higher depreciation charge following the capitalisation of SETEL application.

YTD: 1H19 core earnings dropped by 14% to RM174.7m largely attributable to weaker retail segment due to the abovementioned reasons despite higher sales volume (+6%) and ASPs (+4%). This was marginally offset by slightly better commercial segment on better volume.

Volume growth. Both retail and commercial sales volume demonstrated positive YoY growth of 7% and 9% respectively in 2Q19 (vs +6% and +1% in 1Q19). Cumulatively, retail sales volume growth in 1H19 of 6% was mainly driven by higher number of stations in operations and introduction of the new Petronas Primax 95 with Pro-Drive. This is higher than our projected growth assumption of 2% in FY19. That said, we do not discount the possibility of moderation in the coming quarters in view of fierce competition and rising in usage of public transportation and e-hailing services.

Focusing on non-fuel income. Management’s long term goal of growing non-fuel income to 30% of the total revenue remains intact on the back of its several efforts such as strategic partnership with more brands to attract different consumers and convenience stores upgrade to enhance customer experience. The newly introduced E-wallet, SETEL which offers e-payment solutions is also anticipated to provide better fuelling and purchasing experiences at the petrol stations.

Forecast. Cut FY19/20/21 earnings estimates by 10%/7%/1% respectively after imputing (i) higher depreciation charge, (ii) higher operating expenses and higher retail volume growth assumption of (5%/4%/4%) from 2%/annum previously.

Maintain HOLD with lower TP: RM23.01. Maintain HOLD with lower TP of RM23.01 (from RM24.40) after earnings cut but partially offset by rolling forward our valuation base year to FY20 pegged to unchanged P/E multiple of 24x.

Source: Hong Leong Investment Bank Research - 26 Aug 2019