2Q18 earnings rebounded strongly, by 46% sequentially to RM308.0m, which matched expectations, thanks to improved margin on lower opex despite mixed sales volume while 1Q18 results were hit by lower sales volume and higher costs. Overall, we still maintain our 1% volume growth assumption as stabilised margin should lead earnings to meeting our forecast. It remains MARKET PERFORM at RM25.50 as all positive have been priced-in.

1H18 met expectations. 2Q18 results came within expectations, with core profit surging 46% sequentially to RM308.0m, totalling YTD 1H18 core earnings to RM519.1m which made up 50%/51% of house/street’s FY18 estimates. This is after a sharp decline in 1Q18 which was affected by higher product costs coupled with lower sales volume despite higher ASP. It declared its 2 nd interim NDPS of 16.0 sen (ex-date: 04 Sep; payment date: 19 Sep) in 2Q18 which is higher than the 13.0 sen and 14.0 sen paid in 1Q18 and 2Q17, respectively. YTD 1H18 NDPS is 29.0 sen, slightly higher than 28.0 sen paid in 1H17.

Strong rebound in 2Q18 earnings. After a disappointing 1Q18, 2Q18 core profit surged 46% QoQ to RM308.0m, on the back of a 3% hike in revenue, largely driven by better margins for both Retail and Commercial segments, coupled with improved ASP by 4% at the group level. Retail sales volume rose 3% but Commercial sales volume was reduced by 5% following lower demand especially from jet fuel. All these attributed to the 42% jump in Retail’s earnings and 28% hike in Commercial. Meanwhile, other income rose to RM33.9m from RM6.0m due to insurance proceeds claim received by a subsidiary. Overall, the group’s earnings were partially offset by higher opex of RM10.3m due to increase in A&P expenses as well as professional services.

Earnings largely margin-led despite lacklustre volume. Despite revenue rising 10% YoY, 2Q18 top-line was largely driven by higher ASPs, by 5% and 18% for Retail and Commercial, respectively. However, sales volume dipped 1% for both segment. Nonetheless, lower product and freight costs, and improved MOPS price trend helped Retail’s earnings while higher sales premium helped to boost Commercial’s bottom-line. This led to 29% rise in 2Q18 core profit from RM239.3m in 2Q17. Likewise, 1H18 core income rose 6% from RM492.0m on the abovementioned improved margin on an 8% rise in revenue on the back of 3%/10% increase in ASP for Retail/Commercial while Retail segment posted a 2% decline in volume while Commercial segment saw 4% hike in volume.

To build non-fuel contribution. With limited growth or worst still a trend downwards in its fuel segment given the trend of electric vehicles, PETDAG is building its non-fuel segment which currently makes up 10% of group earnings. In the recent new partnership with Common Ground, the co-working space provider, last week, PETDAG said it wants to grow the non-fuel segment to 30% in 2-3 years. We believe this is fairly an ambitious target. On the other hand, the fuel price maintained since GE14 on 9 May is conducive for the operator to plan and forecast better. However, this may affect PETDAG’s cash-flow to facilitate the purchase and selling prices. Meanwhile, a fixed or cheaper fuel price may encourage traffic flow which is good for sales volumes.

Maintain MARKET PERFORM. Despite a strong set of 2Q18, we maintain our view that most positives have been priced in following its share price run-up of 12% YTD as earnings growth potential is rather unexciting. Thus, we maintain our MARKET PERFORM rating with unchanged target price of RM25.50 on 3-year moving average of 22.9x CY19E PER. The call is supported by a decent dividend yield of 3%. Upside risks to our call include better-than-expected business volume and significant improvement in profit margins.

Source: Kenanga Research - 21 Aug 2018