PETDAG ended FY17 with a bang; profit was at record high with special dividend of 22.0 sen to reward shareholders. This should be share price positive although depleting sales volume could raise concerns. We believe it should be able to sustain its earnings momentum on efficiency. We keep our OUTPERFORM rating on the stock with higher target price of RM27.85/share.

FY17 matched expectation. Although 4Q17 core profit fell 16% to RM279.3m, FY17 core profit of RM1.10b came within our estimate by above 5% but beating consensus by 9%. We believe the stronger-than- expected bottom-line could be due to better-than-expected ASP. Meanwhile, it declared a total of 49.0 sen NDPS, including 27.0 sen regular and 22.0 sen special, (ex-date: 09 Mar; payment date: 27 Mar) in 4Q17, tallying FY17 NDPS to 97.0 sen which was higher than our assumption of 74.4 sen and 70.0 sen paid in FY16. On a regular basis, total FY17 regular NDPS of 75.0 sen is within our expectation.

A good quarter despite a sequential decline. Although revenue rose 4%, 4Q17 core profit contracted 16% QoQ to RM279.3m, no thanks to higher opex on increased A&P activities and training expenses while both Retail and Commercial segments reported lower profit margin. The higher revenue was driven by higher ASP by 8%, which was offset by lower sales volume by 3%. Although this was a weaker QoQ quarter, the core profit of RM279.3m was still the second highest earnings after the record profit of RM333.6m, largely due to lagged gain, recorded in the preceding quarter.

Higher ASP led YoY results. 4Q17 core profit grew 7% from RM261.5m on the back of 16% jump in revenue, attributable to 17% rise in ASP with sales volume inching up 1%. The higher ASP was witnessed by both the Retail (+18%) and Commercial (+16%) segments while the small growth in sales volume was led by Commercial growth of 8%, which was mitigated by the 6% decline in Retail Segment. YTD, FY17 core profit grew 11% on the back of 23% hike in revenue. The earnings were attributable to strong ASP, which leapt 25% following the increase in Mean of Platts Singapore (MOPS) by 25%. However, sales volume was marginally reduced by a mild 1%.

ASP outlook remains strong but sales volume declining. In view of steady recovery of crude oil price and thus higher MOPS, ASP is likely to be on the uptrend. However, sales volume could be lower given overall de-growth experienced by all the industry players. In the near term, 1Q18 sales volume is likely to improve given the CNY festive traveling period in February and a short school break in end-March. Meanwhile, the new weekly review of fuel pump prices should be a positive as it is more reflective of market prices compared to the monthly review; thus, resulting in better inventory cost control.

Reiterate OUTPERFORM. Post FY17 results, we upgraded FY18 earnings estimates by 9% after adjusting for higher ASP and sales volume while we introduced our new FY19 forecasts with 2% earnings growth. In view of the expected upbeat momentum following the dividend surprise, we decided to value the stock based on CY19 earnings based on lower 3-year moving average of 22.1x from 22.8x previously to derive a new target price of RM27.85 from RM25.20 previously. The implied CY18 PER is 23x which we believe is not excessive given its resilient earnings. It remains an OUTPERFORM. 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 - 27 Feb 2018