Overall retail volume growth is expected to stay positive in 2H19 (vs 1H19’S 6%) at the expense of higher advertising and promotional cost. Capex spending in 2H19 is likely to be similar to 1H19, which is in line with our RM400m/annum assumption. Meanwhile, Petdag is taking up additional business risk by co investing with its JV partners (i.e. Tealive) to boost its non-fuel income. With no changes in our estimates, we reiterate HOLD recommendation on the counter with unchanged TP of RM23.01 pegged to 24x FY20 PER.

Healthy volume growth in 2Q19: Both retail and commercial sales volume demonstrated positive YoY growth of 7% and 9% respectively in 2Q19 (vs +6% and +1% in 1Q19). This is mainly driven by higher number of stations in operations and introduction of the new Petronas Primax 95 with Pro-Drive. Management is hopeful for sales volume growth to stay positive in 2H19 backed by continuous marketing and promotional expenses. That said, we are maintaining our retail growth assumption of 5% in FY19 as 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.

Opex could stay elevated. Opex has increased by 6% QoQ and 24% YoY to RM621m in 2Q19, largely attributable to higher marketing and promotional expenses related to Primax 95. We believe overall opex will be flat at best or possibly higher this year. On the other hand, depreciation charge in 2H19 will also be higher from the full impact of capitalisation of SETEL in 2Q19.

Capex guidance. Petdag has doubled up its capex spending in 2Q19 to RM133m in 2Q19, bringing its 1H19 total capex to RM197m. Meanwhile, its outstanding capital commitment including the approved and contracted for as well as approved but not contracted for is lowered down to RM489.5m from RM537.8m as of end-2Q19. While some of its asset refurbishment activities could slow down, digitalisation transformation and capex to grow non-fuel income remains intact. Thus, we reckon that Petdag could still spend capex of RM400m/annum in FY19-20.

Expanding non-fuel income. Its non-fuel income including Kedai Mesra contribution has fallen 12% QoQ and 21% YoY in 2Q19. Management is currently reviewing its strategy to boost this segment including the collaboration with its joint-venture partners. For instance, Petdag has co-invested with Loob Holdings to open 35 Tealive franchised stores at its petrol stations YTD and is eyeing to open up to 100 stores by end of the year. Instead of earning a fixed rental income, Petdag will commit portion of the capex (c. RM150k/store) and will be entitled to share its profit in return. With this, Petdag would potentially increase its non-fuel income to RM80psf from current level of RM24psf. While such business model will allow Petdag to ride on the business performance of their joint venture partners, careful selection of partners is necessary without bearing excessive business risk.

Forecast. Maintained as the briefing yielded no major surprises.

Maintain HOLD, TP: RM23.01. Maintained HOLD with unchanged TP of RM23.01. TP is pegged to unchanged 24x FY20 PER.

Source: Hong Leong Investment Bank Research - 27 Aug 2019