• Maintain BUY (TP: RM25.40). Petronas Dagangan (PetDag) 9M23 core PATAMI of RM743mn (+31% YoY) met both our and consensus’ expectation at 73% and 72% respectively. 3Q23 core earnings declined 38% QoQ and 41% YoY to RM169mn but this is likely to be temporary as the company will eventually revise higher its product pricing and pass the higher cost to the clients. The soaring sales volume that achieved yet another record high at 4.2bn litres further bolstered its earnings outlook in upcoming quarters. The company declared a 3rd interim DPS of 20sen (9M23 DPS: 53sen) which is on track to meet our FY23 DPS forecast of 72sen. Maintain PetDag as a BUY with higher DCF-derived TP of RM25.40 (from RM24.30) as we roll over our valuation to FY24. While the subsidy rationalisation plan posed key downside risk to our earnings forecast, we keep it unchanged at this juncture amidst uncertainties on the mechanism of the planned targeted subsidy.

• Key highlights. 3Q23 core earnings declined 38% QoQ and 41% YoY to RM169mn mainly due to higher product cost of Jet A1 and diesel fuel that was inline with oil price uptrend movement. Nonetheless, sales volume broke a new record as it grew by another 2% QoQ to 4.2bn litres driven by stronger demand for mogas and diesel as well as increase in flight frequency. A 3rd interim DPS of 20sen was declared which is similar to 3Q22 DPS. This brings YTD DPS to 53sen (9M22: 36sen) which implies a payout ratio of 71% (9M22: 63%).

• Earnings forecast. No changes to our earnings forecast.

• Outlook. Petdag’s sales volume remain on the uptrend driven by robust economic activity that is running at full cylinder. However, this put the government at risk of falling short of its fiscal target due to ballooning subsidy allocation for fuel. Hence, this may force the government to reduce fuel subsidy and jeopardise fuel demand.

Source: BIMB Securities Research - 24 Nov 2023