PETDAG's 9MFY24 results were within our expectation but slightly above consensus. Core profit improved on the back of favourable MOPS price trends, which drove margin expansion, alongside higher overall sales volumes. We believe market concerns over subsidy rationalisation's impact on volumes are overplayed, as sales volumes have demonstrated resilience. The stock's implied FY24F PER remains below 1SD of its 5-year historical mean, highlighting its attractive valuation. We maintain our forecast, DCF TP of RM21.20 and OUTPERFORM call.

Within expectations. Its 9MFY24 core profit of RM858.5m (after excluding EI of RM20.1m impairment on PPE) came within our (86.7%) but slightly above consensus (89.7%) expectations. We deemed it within expectation as typically in 4Q of the year, PETDAG's marketing expenses will peak. It also announced an interim DPS of RM0.24, which is roughly in line with our expectations as well.

Retail and commercial margins improved. Retail and commercial margins improved. Its 9MFY24 increased 5% YoY due to increased retail revenue underpinned by higher sales volume (+8% YoY) and stronger reported commercial revenue (driven by higher demand for Kedai Mesra and Café Mesra). Core profit surged 10% YoY due to improved EBIT margins across retail and commercial divisions due to the favourable trend of the Means of Platts Singapore (MOPS) prices (which forms the basis for its product pricing) in the quarter.

Margins improved QoQ. Sequentially, the group's topline dipped slightly by 1%, attributed to marginal declines in retail and commercial volumes. However, core profit rose by 22% QoQ, supported by reduced operating costs and improved margins from commercial segment due to favorable pricing and stronger convenience division contribution, which enhanced overall profitability.

Subsidy impact muted so far. The government's diesel subsidy rationalisation introduced in July 2024, aimed at curbing smuggling along the northern border, has had a limited impact on PETDAG's overall diesel volumes. With the gasoline subsidy rationalisation expected in mid-2025, the highly targeted implementation is unlikely to significantly disrupt consumer behaviour significantly, ensuring minimal impact on PETDAG's volumes. This, coupled with the company's strong fundamentals, positions it well for steady performance in the near term.

Forecasts. Maintained.

We maintain our DCF-based TP (WACC: 11%; TG: 0%) at RM21.20 with a WACC of 11% and terminal growth rate of 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 (17.5x) at 1SD below the 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 - 26 Nov 2024