INVESTMENT HIGHLIGHTS

• CAPEX rationalisation in 2HFY19 to strengthen earnings

• Various growth initiatives to cushion earnings impacted by volatile crude oil price

• Aggressive marketing efforts to continue in targeted areas

• SETEL usage continues its increasing trend

• FY19-20F earnings estimates maintained

• Maintain BUY with an unchanged TP of RM28.35 per share

Earnings in 2HFY19 to strengthen with re-alignment of CAPEX. We returned from attending Petronas Dagangan’s analyst briefing yesterday feeling upbeat on its earnings prospect. We remain optimistic on PetDag’s earnings trajectory given that it will be relooking into its CAPEX and managing its OPEX spending – to redeploy into more earnings accretive initiatives going forward.

2QFY19 earnings impacted by decline in MOPS price and high OPEX. Recall that, Petronas Dagangan’s 2QFY19 earnings contracted by -41.5%yoy to RM172.8m mainly due to the decline in MOPS prices – which resulted in lower product margin as well as; higher operating expenses (OPEX). The higher OPEX is mainly attributable to higher spending on advertising and promotions coupled with higher adoption of Mesra points. That said, revenue grew by +4.5%yoy with sales volume increasing by +8.0%yoy mainly from: (i) the increase in productivity of refurbished stations; (ii) higher number of stations in operation and; (iii) conversion from other brands to Petronas. While we note that the volatility brought upon by the movement of crude oil price will continue to affect MOPS prices however; we do not expect the adverse impact to prolong as various growth initiatives currently employed by PetDag will assist to cushion the impact of volatile crude oil price.

SETEL usage continues its increasing trend. The mobile application SETEL that was developed by PetDag has continued to be well-received by its customers even though SETEL has yet to be officially launched by the company and the application is still in its pilot period. The mobile application since its inception last year has seen total spending increase in the past quarter by +4.0 - 5.0% (vs 1QFY19) with a total of 277 stations in the Klang Valley are now able to enjoy the benefit of the mobile application.

We understand that the first half of 2019 spending via SETEL amounted to an encouraging RM11.0m. According to Management, it is now in the midst of expanding SETEL’s network to major cities in Malaysia by October to November this year to further leverage on the encouraging usage of SETEL.

Marketing efforts to continue; albeit in a more targeted manner... Going forward, Management reiterated that it will continue to spend on marketing albeit in a more targeted manner - in its effort to control its OPEX spending but at the same time; enhance its brand visibility as well as to create stickiness to the Petronas brands. This is especially so for the marketing and promotion that it has committed to from earlier this year such as: (i) the marketing for PETRONAS PRIMAX 95 Pro-Drive which was launched back in February; (ii) refurbishments of critical earnings-accretive stations as well as; (iii) Mesra Bonanza campaign which has been extended throughout FY19.

Meanwhile, Management expects the promotional and acquisition costs for the SETEL application to taper-off going forward as the respective station dealers will now be promoting the SETEL application. The Management also expect that the promotion for SETEL will be in the form of indirect marketing via its potential collaborative partners going forward where PetDag will be able to tap into their respective customer base.

Ongoing asset refurbishments might constrain volume growth, however…. While we note that the ongoing asset refurbishment initiative coupled with the impending implementation of the targeted petrol subsidy program in 3QFY19 could potentially cap volume growth in FY19 however, as evident in the recent two quarters; the newly refurbished petrol stations in FY18 as well as; the aggressive promotional activities have successfully increased sales volume and cushioned PetDag’s earnings. We understand from the Management that the newly refurbished stations have indicated an average of +3-4% increase in sales as of end-December 2018. We also note that productivity per pump island has increased for the newly refurbished stations. Hence, we do not view volume growth as a concern at this point in time.

Impact on earnings. We are making no changes to our FY19-20F earnings estimates at this juncture.

Maintain BUY. We are maintaining our BUY recommendation on PetDag with an unchanged TP of RM28.35. Our valuation is premised on forward PER20 of 27x pegged to EPS20 of 107.8sen. The target PER is based on PetDag’s five-year rolling average PER. We maintain our BUY recommendation on PetDag given that we remain optimistic on: (i) increasing productivity per station due to CAPEX rationalization plan; (ii) lower sales volume – due to ongoing asset refresh activities to be cushioned by newly refurbished stations; (iii) better inventory management following new dealers’ commission; (iv) increasing spending per transaction on SETEL mobile application; (v) robust balance sheet; as well as; (vi) continued aggressive marketing activities. Furthermore, dividend yield remains decent at 3.9% FY20F.

Source: MIDF Research - 27 Aug 2019