PETDAG presented yet another solid set of results in 1Q17, as business volume remained healthy albeit 6% decline from the preceding quarter. In the immediate term, 2Q17 will be another solid quarter given the high traffic volume expected for school holidays and Hari Raya holidays toward the end of the quarter. All these are catalysts to PETDAG’s share price in the near-term while long-term earnings sustainability is supported by volume growth and operational efficiency. It remains an OUTPERFORM with a higher price target of RM26.70/share. It also offers a decent yield of 3%.

1Q17 in line. PETDAG reported 1Q17 results, matching expectations with 1Q17 core profit recorded RM252.8m making up 25%/27% of house/street’s FY17 full-year estimates. A 1st interim NDPS of 14.0 sen was declared (ex-date: 31 May; payment date: 16 Jun) as opposed to 12.0 sen and 30.0 sen paid in 1Q16 and 4Q16 respectively.

A slight declined sequentially. Despite top-line growing 11% led by 18% growth in ASP as Mean of Plats Singapore (MOPS) increased but was mitigated by 6% decline in sales volume, 1Q17 core profit fell 3% QoQ to RM252.8m which was attributed to (i) sales volume declined as it is a volume play, (ii) higher taxation by 7% as effective tax rate normalised to 24% from 22% previously. On the other hand, depreciation charges normalised in 1Q17, which fell 31% to RM84.5m after the seasonally high charges in 4Q16.

Strong numbers from last year. With revenue surging 36% on the back of 43% hike in ASP as MOPS moved higher, 1Q17 core earnings leapt 15% from RM220.4m in 1Q16 which was partly due to better operating cost management such as lower inventory cycle. However, 1Q17 sales volume slid 4% from last year. Segmental-wise, reported retail revenue rose 23% to RM2.89b as ASP expanded by 31% but sales volume dropped 6% while operating profit grew 29% as margin improved from LPG following competitive product cost. For Commercial segment, revenue jumped 53% on the back of 60% surge in ASP, but business volume fell 3%. Nonetheless, operating profit fell 1% due to higher opex.

Another strong quarter in 2Q17? Effective 30th March, fuel pump prices will be announced on a weekly basis every Thursday as opposed to a monthly review basis previously. We view this positively as the weekly review is more reflective of market price compared to the monthly review. Thus, better inventory cost control. Meanwhile, with school holidays starting from end-May to early-June coupled with the Hari Raya holiday by the end of June, traffic volume is expected to be high, which could also lead to better business volume.

Maintain OUTPERFORM. We continue to rate the stock OUTPERFORM given its resilient business volume while the weekly pump price review should help them mitigate inventory cost shock to ensure better profit earnings. Our new price target is now RM26.70/share from RM26.63/share previously as we rolled over our valuation base-year to CY18 from CY17 based on 3-year moving average of 25x earnings multiplies from the previous 3-year moving average of 26x. Meanwhile, our earnings estimates remained unchanged for now. Risks to our call include sharp drop in business volume and a sudden plunge in MOPS within a brief period of time.

Source: Kenanga Research - 19 May 2017