4Q19 core net profit of RM131.0m (-46.7% QoQ, -161.8% YoY) brings FY19’s total core net profit to RM822.3m (-4% YoY). At 90%/89.3% of our/consensus full year estimates, the results are deemed to be below expectations. We adjust our earnings downwards by 12%-11% for FY20-21 as we account for higher OPEX moving forward. Maintain our HOLD call with a lower TP of RM20.31 (from 23.01) based on FY20 earnings pegged to unchanged P/E multiple of 24x.

Below expectations. 4Q19 core net profit of RM131.0m (-46.7% QoQ, +161.8% YoY) brings FY19’s total core net profit to RM822.3m (-4% YoY). At 90%/89.3% of our/consensus full year estimates, the results are below expectations. The deviations namely stems from higher A&P costs which we believe relates to the rolling out of the SETEL – an advanced retail intelligence platform for Petronas users.

Dividends. Declared fourth dividend of 25 sen/share and a special dividend of 15 sen/share (ex-date: 10 March; payment date: 26 March), bringing FY19 DPS to 85 sen/share (vs. 70sen/share in FY18), representing a payout of 102% yielding 4.0%.

QoQ: Revenue declined by -0.2% QoQ on due to lower volume. EBITDA declined by 27% QoQ on higher product costs from both the retail and commercial segments, higher A&P and network upgrade costs, and higher finance costs (+28% QoQ). Subsequently, Core net profit declined by 46.7% QoQ to RM131.0m.

YoY: Revenue declined 1.4% QoQ on lower ASP’s (-4%) partially offset by higher volumes (+3%). Core net profit improved by 162% YoY largely attributable to increasing MOPS prices trend during the quarter, despite the higher advertising and promotion expenses as well as higher depreciation charge (+54% YoY) following the capitalisation of its “SETEL” application.

YTD: FY19 core earnings declined by 4% to RM829.5m largely attributable to weaker retail segment due to the abovementioned factors despite higher sales volume (+6%) dragged by a decline in ASPs (-4%), higher system maintenance costs and A&P expenses. This was marginally offset by slightly better commercial segment on better volume (+4%) attributable to Jet A1 sales and higher demand for diesel from the upstream sector.

Outlook. Cumulatively, retail sales volume growth in FY19 of 6% YoY was mainly driven by higher number of stations in operations and introduction of the new Petronas Primax 95 with Pro-Drive. In view of management’s long term goal of growing non-fuel income to 30% of the total revenue, we can expect further strategic partnerships with popular consumer brands to attract a multitude of consumer segments in an effort to grow its same stores sales growth. SETEL which offers e payment solutions is also anticipated to provide better fuelling and purchasing experiences at the petrol stations; however we can expect margins to be affected by customer acquisition costs relating to this venture.

Forecast. We adjust our earnings downwards by 12%-11% for FY20-21 as we account for higher OPEX moving forward.

Maintain HOLD and TP: RM20.31. Maintain our HOLD call and a lower TP of RM20.31 (from RM23.01) based on FY20 earnings pegged to unchanged P/E multiple of 24x.

Source: Hong Leong Investment Bank Research - 26 Feb 2020