INVESTMENT HIGHLIGHTS

• Better earnings expected from CAPEX rationalisation

• Potential revision in asset refresh

• Dealers’ commission increase to drive productivity

• SETEL usage on an increasing trend

• Newly refurbished station to boost FY19 earnings

• FY19-20F earnings revised up by +4.9% and +2.4%

• Upgrade to BUY with a revised TP of RM28.35 per share

Rationalising CAPEX spending to spur growth. Petronas Dagangan (PetDag) in its quarterly analyst briefing yesterday announced that it will be re-looking into its planned CAPEX spending for the year. Earlier, it was guided by the Management that CAPEX spending for FY19 would be in the tune of RM500m. However, Management disclosed yesterday that it will be rationalising its CAPEX spending beginning in the 2HFY19 where it reiterated that CAPEX spending will mainly be channelled to proven earnings accretive initiatives. Hence, CAPEX spending for the year might be reduced to below RM400m or similar to that of FY17. With this, we anticipate earnings to be boosted further given that the company is focusing on increasing productivity per pump island going forward.

Potential revision in asset refresh. Management had previously guided that PetDag will be going through another round of asset refresh this year where the number of stations to be refresh is similar to that of last year’s at about 300 stations. That said, given that the company is looking into rationalising its CAPEX spending for the 2HFY19, it was guided that the number of asset refresh could be lower than initially planned as Management is targeting to focus on earnings accretive assets. We opine that the number of stations to be refurbished cos be to the tune of 200 stations vs 300 stations previously.

Dealers’ commission increase to drive productivity. Following the announcement of a 3.0sen increase in petrol dealer’s commission by the Government in its bid to address falling margins experienced by petrol dealers earlier this year; Management found that it has actually encouraged better inventory management on the petrol dealers’ side. The petrol dealers are now more incentivised to ensure optimal level of inventory in their respective station which in turn increases productivity across the supply chain.

Source: MIDF Research - 30 May 2019