KEY INVESTMENT HIGHLIGHTS

• SAF to see challenges in pricing and regulations, expected commercialization in CY28
• Diesel subsidy rationalization impact on Retail and Commercial Diesel continue to be observed
• EV charging stations refurbishment ongoing for pump stations
• Maintain BUY with TP of RM24.63

We hosted a roundtable discussion session with Petronas Dagangan (PDB) on 9 October 2024. The objective of the event was to engage with PDB and gain insights on the group's ongoing projects, financials and prospects.

Key takeaways from the session are as follows:

A long way to go for SAF. Sustainable aviation fuel (SAF) had been a crucial part of PDB's sustainability initiatives. Among PDB's efforts to develop and promote SAF include: (i) strategic partnerships with Malaysia Aviation Group (MAG) and Neste to establish a robust SAF supply chain, (ii) refining, storage and distribution facilities improvements for SAF, and (iii) collaborations with government bodies to advocate for supportive policies for SAF adoption. PDB's SAF initiative is in the blending of the biofuel, in accordance with the requirements dictated by the airlines that use SAF. However, SAF is still facing an operational cost challenge (i.e. SAF pump price is expected to be 3-5 times higher than Jet A1 fuel). The differing regulations and pricing model of SAF blends may also hamper demand. Nevertheless, PDB is expected to continue educating on SAF to the aviation sector, in anticipation that SAF will be fully commercialised by 2028. This is also in line with the group's Used Cooking Oil (UCO) collection programme, which could be outsourced to third-party processing plants that will change UCO into biofuel, including SAF. Overall, we expect SAF to continue to be an integral part of PDB's sustainability efforts, despite the challenges.

Leveraging on increasing coffee enthusiasts. PDB remains committed to enhance its non-fuel operations, which includes its Café Mesra franchise. Demand for coffee and on-the-go meals prompted PDB to establish Café Mesra outside of the premise of pump stations. At the time of writing, the profitability of Café Mesra's products are still being monitored. Amid the shift in customer spending and expiring contracts from other F&B partnerships, we believe that this would be a positive development for its Convenience business in the long term, given that coffee consumption in Malaysia had grown over +75% since 2020.

Observation continues for targeted fuel subsidy. PDB had reported that, following the commencement of the targeted subsidy rationalisation for Diesel since Jun CY24, Retail volume for Diesel had decreased by 30-50%. However, the same volume is gained by the Commercial segment. Commercial Diesel is a highly regulated commodity in Malaysia, and while Retail Diesel has a higher profit margin, PDB continues to observe the demand for Commercial Diesel. Commercial Diesel is highly regulated and had seen a significant uptake, as the government continues to offer a fleet card that allowed Commercial Diesel to be traded with subsidy for eligible customers. Under PETRONAS, this incentive is called Smart Pay. As of writing, Retail Diesel's demand amid the subsidised pricing has lowered but overall remains healthy, and we anticipate that the shift from Retail to Commercial Diesel will continue in the near future, as the government remains committed to regulate Diesel pricing and avoid leakages. Following the government's targeted subsidy programme for Diesel, we believe there is a possibility for RON95 to be subjected to a similar rationalisation. However, in the case where targeted subsidy on RON95 fuel is carried out, we expect the profit margin will have little to no change for PDB given that retail petrol price is semi- regulated.

Delivering better EV solutions with Gentari. PDB had shared its success in engaging with Gentari - a global clean energy establishment by PETRONAS - in providing electric vehicle (EV) charging stations at its conventional pump stations across the nation. Gentari is focused on renewable energy, hydrogen fuel production and green mobility. As of writing, 67 EV charging stations have been established in PDB's pump stations, of which the EV charging equipment and infrastructure are fully provided by Gentari. These EV charging stations provide an opportunity for PDB to invest in green solutions for its conventional fuel stations, subsequently adhering to its ESG goals. Additionally, the recent MoU with PLUS highways to observe potential sites along the highways for a superstation - which will combine conventional fuel pumps (RON95, RON97, Diesel and NG), EV charging stations, Mesra convenience store, Café Mesra and other partnership stores - signals a potentially higher demand for EV charging station and PDB's pump station services in a one-stop location in the long run. We believe PDB will continue to observe customer's behaviour regarding EV, as EV usage is highly dependable on its affordability, as well as sentiments and awareness for environmental sustainability.

Overall view remains positive. We reiterate our positive stance on PDB's ongoing SAF project, Café Mesra expansion and integration of EV charging stations, in line with its earnings prospects. We also continue to expect better sales volumes attributable to the anticipation of higher travelling frequency in the end-year holiday season. Additionally, the green mobility initiatives and clean fuel projects remain a leverage to an attractive and healthy investment for PDB. Fuel prices is also expected to be relatively stable, following the average Brent crude oil price at USD73pb in 3QCY24, barring any sudden escalations in geopolitics following conflicts in Middle East and Eastern Europe, as well as the upcoming US elections.

No changes to earnings estimates. Prior to PDB's upcoming 3QFY24 earnings result, we make no changes to our earnings estimates and maintain our BUY call on PDB with an unchanged target price of RM24.63.

Source: MIDF Research - 15 Oct 2024