PETDAG’s 1HFY24 was within our and street’s estimates. Higher opex, YoY, resulted in lower core earnings for 1HFY24. We cut our DCF-TP by 11% to RM21.20 after increasing our WACC to account for the timing uncertainties of the RON95 subsidy rationalisation.

Despite that, the implied FY24F PER would be at 21.2x, still below its 5-year mean of 26.5x. We maintain our forecast and OUTPERFORM call.

Within expectations. Its 1HFY24 core profit of RM521.6m (after excluding EI of RM16.8m impairment on PPE and RM8.2m impairment write back on trade receivables) came within our (51.6%) and consensus (51.3%) expectations. It also announced an interim DPS of RM0.20, which is roughly in line with our expectations as well.

Commercial and convenience margins declined. Its 1HFY24 topline improved by 10% YoY, driven by higher retail revenue due to increased sales volume and a stronger commercial topline owing to higher average selling prices. However, its bottom line declined by 12% YoY due to weaker operating margins in the retail, commercial, and convenience divisions, attributed to higher operating costs. JV and associate also reported wider losses, further contributing to the YoY earnings decline.

Margins improved QoQ. The group’s topline improved by 5% QoQ, driven by higher overall sales volumes, partially due to seasonality. Core profit surged 26% sequentially as operating margins improved across all its major business divisions, largely due to better product margins across the board.

Near-term subsidy rationalisation impact might be less severe than expected. Concerns over PETDAG’s outlook increased when the Malaysian government announced the removal of the diesel subsidy for retail channels in July 2024, aimed at curbing diesel smuggling, particularly along the northern border of Peninsular Malaysia. However, we believe that the near-term impact on PETDAG’s overall diesel volumes may be more muted than what the market had anticipated. A relevant case study is the Indonesian market, where gasoline subsidies were partially removed in 2015, yet gasoline sales volumes per day continued to grow from 470,000 barrels per day gradually to 670,000 barrels per day by 2023.

Forecasts. Maintained.

We reduce our DCF-based TP (WACC: 11%; TG: 0%) by 11% to RM21.20 (from RM23.70) on the basis of weaker long-term volume outlook post subsidy rationalisation by increasing the WACC to 11% (from 10%) and reducing terminal growth rate to 0% There is no change to our valuation based on ESG given a 3-star ESG rating as appraised by us (see Page 5).

We like PETDAG due to: (i) its highly cash generative business that translates to high capacity to pay dividends, (ii) valuation (18.7x) at - 1SD below 5-year mean as the market might have overcorrected for negative impact of subsidy rationalisation, and (iii) growing convenience division revenue on stronger demand for Café Mesra. Maintain OUTPERFORM.

Risks to our call include: (i) worse-than-expected subsidy rationalisation impact, (ii) the global economy slips into a recession and derails recovery of international air travel, and (iii) faster-than-expected EV adoption in the domestic market which could hurt its gasoline sales.

Source: Kenanga Research - 21 Aug 2024