Despite a weak 3Q18 result, it is still on track to meeting our FY18 forecast. However, with declining sales volume trend coupled with the recent plunge in crude oil prices, which may lead to a margin decline, the stock is fairly priced in following its solid price performance this year. As such, we maintain our MARKET PERFORM recommendation with an unchanged target price of RM25.50.

9M18 matched expectations. At 76% each of house/street’s FY18 estimates, 9M18 core profit of RM789.7m came within expectation. It declared a 3 rd interim NDPS of 16.0 sen (ex-date; 10 Dec; payment date: 26 Dec) in 3Q18 which is the same as 2Q18 but lower than 20.0 sen paid in 3Q17, totalling YTD 9M18 NDP to 45.0 sen which is lower than 48.0 sen paid for the same period last year.

Weaker sequential results but overall margin improved. Despite revenue rising 7% to RM7.82b, 3Q18 core profit fell 12% QoQ to RM270.7m due to: (i) higher opex by RM34.9m on write-off of PPE and higher repair and maintenance work for refurbishment of station, and (ii) lower other income by RM26.3m as there was an insurance claim received in 2Q18. However, the increase in revenue was largely due to higher sales volume by 3% in Retail segment and 7% in Commercial segment while ASP was higher by 2%. This led to higher margin of RM28.4m in 3Q18.

YoY results impacted by higher opex and lower volume. Although revenue jumped 17%, largely led by higher ASP of 7% for Retail segment and 31% for Commercial, 3Q18 core profit contracted 19% from RM333.6m which was attributable to higher opex on A&P for Retail segment and lower sales volume by 2% for Retail segment and 8% for Commercial segment. Similarly, 9M18 also faced the same issues as core profit dipped 4% to RM789.7m from RM825.6m in 9M17 despite revenue growing 11% over the year. This was partly due to higher taxation as well as earnings decline at Commercial on lower sales volume. The hike in revenue was primarily due to higher ASP of 4% and 17% for Retail and Commercial segments, respectively.

Volume could decline further in 4Q18. It is currently the traditional weak volume quarter of 4Q as consumers tend to travel by air than by land in the year-end season. In addition, the recent plunge in crude oil prices may not augur well for ASP, which could lead to an overall decline in revenue. Meanwhile, with limited growth or worse 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. On the other hand, the fuel price maintained since GE14 on 9 May is conducive for the operator to plan and make forecasts 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. Although earnings growth potential is rather unexciting, the strong share performance of 13% gain YTD against the 6% decline in FBMKLCI may indicate that most positives could have priced in. Thus, we maintain our MARKET PERFORM rating with an 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 - 28 Nov 2018