Highlights

• Following are the salient points from analyst briefing yesterday.

• Overall sales volume was lowered by 6% YoY mainly due to cautious consumer spending pattern. For the retail segment, volume has declined by 11% YoY which was led by decrease in diesel sales (-32% YoY) mainly due to impact of stricter enforcement by authorities to curb diesel leakages. Sales volume for commercial segment decreased slightly by 2% YoY mainly due to lower sales for fuel oil.

• Sales volume for lubricant was lowered by 15% YoY due to implementation of GST as dealers were trying to minimise stock holding before GST as they cannot claim input tax. However, PetDag see volume pick up in Apr 15 and May 15. In addition, the transition process to implement GST system on petrol stations is smooth and none of the stations were closed.

• EBIT margin has improved from 2.8% to 4.7% YoY as opex was reduced by RM65m which was due to variation in yearly bonus payment and lower marketing and promotion expenses. We understand that this sharp decline in opex might not be sustainable and will increase to RM320m level for consequent quarter.

• PetDag is targeting to cut 15% in capex with budget capex of RM500m in FY15. It is aiming to open 20-30 petrol stations for the year with 7 stations already operational in 1Q15.

• Despite better than expected 1QFY15 result, valuation remains lofty at current price. PetDag is trading at premium valuation of 31x FY15 P/E and 26x FY16 P/E. However, this is in line with Nestle’s val uation which currently tradi ng at 27x FY16 P/E given both also focusing on consumer products.

Forecasts

• Unchanged.

Catalysts

• Oil price stability will provide margin visibility.

• Successfully expansion at oversea markets.

• Higher dividend payout.

Risks

• Fluctuation in oil price
• Cost escalation due to aggressive expansion plan

Valuation

We like the company business model with sustainable recurring income, however we believe the positive factors (rebounded in oil price and solid business model ) has been largely reflected in share price performance. Hence, we maintain our HOLD call and target price of RM21.14 based on 26x FY16 P/E (in line with historical average P/E) with projected dividend yield of 2.7%.

Source: Hong Leong Investment Bank Research - 13 May 2015