In an analyst briefing, PETDAG shared that the decline in its retail diesel volumes due to subsidy rationalisation has been largely offset by an improvement in its commercial division. Additionally, the significant sales drop from petrol stations near the Malaysian border appears to be insignificant relative to the group’s total sales at this juncture. We maintain our forecasts, TP of RM21.20 and OUTPERFORM call.

We came away from PETDAG’s analyst briefing feeling reassured of its near-term prospects. The key takeaways are as follows:-

1. In July 2024, PETDAG has not observed a decline in overall diesel volumes following the removal of the diesel subsidy a month ago, as there has been a shift from the retail division to the commercial division. Due to the group’s higher market share in the commercial diesel market, it has largely managed to offset the impact of the diesel subsidy rationalisation on retail volumes. This aligns with our view that the impact of subsidy rationalisation will be relatively muted for PETDAG, if at all, given the inelasticity of demand for diesel overall.

2. PETDAG has guided that the drop in its retail diesel volume in July 2024 was approximately 30% MoM, which aligns with the 30% decline reported for Malaysia’s diesel pump sales in The Straits Times. We also note that diesel sales at petrol stations near Malaysia’s border fell by a steeper 40% MoM. Therefore, if PETDAG manages to offset the volume drop by rerouting demand to the commercial business, it could imply that the diesel smuggling volume could be insignificant relative to its sales volumes. We will continue to monitor the volumes in the coming months to gain a clearer understanding of the impact of the reduction in smuggling volumes.

3. In 1HFY24, PETDAG added eight new petrol stations, bringing its total station count to 1,100. At this juncture, the group has already equipped 60 stations with DC charging for electric vehicles, nearly double the number of enabled stations in 1HFY23. While we do not expect the EV chargers to generate significant income for the group (Gentari is the main operator and PETDAG primarily acts as a space provider), we believe the additional EV traffic to these 60 stations will support revenue growth in its convenience division (Kedai Mesra).

Forecasts. Maintained.

We maintain our DCF-based TP (WACC: 11%; TG: 0%) at RM21.20.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 (19.8x) 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 rationalisatio impact, (ii) the global economy slips into a recession and derails recover of international air travel, and (iii) faster-than-expected EV adoption in th domestic market which could hurt its gasoline sales.

Source: Kenanga Research - 22 Aug 2024