Petronas Dagangan’s (PetDag) retail and commercial sales volumes grew by 8% and 9% yoy in 2Q19. We believe retail sales volume growth could soften in the near term as PetDag intends to relook at its loyaltypoint campaign and lower its marketing expense. We maintain our HOLD rating with a lower target price of RM23.95 (from RM24.60) to reflect minor balance sheet adjustments.

Increased Sales Volumes for Retail and Commercial Segments

2Q19 retail volume grew 8% yoy on the back of improved station productivity from the ongoing asset refresh program. The recently introduced SETEL app drove sales volume higher by 11m litres in 1H19, which was <1% of total retail volume. The commercial segment recorded 9% yoy growth in volume from increased demand for Jet A1, Petcoke and Bitumen. The LPG volume grew by 3% yoy but lubricant sales fell by 15% yoy.

Higher OPEX Due to Mesra Redemptions and A&P Costs

Operating expenses in 2Q19 were higher by 24% yoy due to higher Mesra point redemptions and advertising and promotion (A&P) costs. In light of the higher Mesra point redemptions, management is currently looking to revise the points program to reduce the cost. In our view, the potential removal of the current “3x Mesra points” campaign will likely see an adverse impact on the sales volume, which is confirmed by management. We highlighted in our initiation report that one of the group’s competitive advantages is the attractive point-to-dollar redemptions. Management is also looking to reduce the marketing cost moving into FY20, which may affect retail sales volume as well.

Targeted Subsidy to be Announced in Sept-19

The mechanism of the targeted fuel subsidy will likely to be a direct cash credit into the B40 group’s bank account. PetDag is uncertain if the government intends to float RON95 pump prices immediately after implementing the fuel subsidy or provide a grace period for prices to stabilize.

Maintain HOLD

Our takeaways from this briefing is that beyond the volatility of MOPS prices, with the increased in OPEX depressing the group’s margins, while lower targeted marketing costs will lead to softer sales volumes going forward. We reduce our FY20-21E EPS by 3% post-balance sheet adjustments. We maintain our HOLD rating given the muted near-term outlook with a lower DCF-based 12-month target price of RM23.95 (from RM24.60).

Source: Affin Hwang Research - 27 Aug 2019