KUALA LUMPUR (Jan 22): Petronas Dagangan Bhd’s (PetDag) system is set for the implementation of diesel subsidy rationalisation, with no impact on sales volumes given that it is an essential fuel item, Kenanga Research said on Monday.

The investment bank said this is also evident from historical data, when petrol and diesel prices were floated in 2019, with no material impact on PetDag’s retail sales volumes.

Kenanga also noted that PetDag does not expect a substantial earnings contribution from electric vehicle (EV) charging in the financial year ending Dec 31, 2024, given that the EV market is still in its early stage.

“Conversion of alternating current (AC) chargers to direct current chargers is under way to decrease the average charging time for EV users. With 20 available AC charger stations, PetDag’s partner, Gentari, will increase capacity in the coming years,” Kenanga Research said in a note on Monday.

It added that PetDag will earn income via fees paid by Gentari or profit-sharing arrangements, with no direct operation of the charging stations.

PetDag is also growing its Café Mesra outlets at a more measured pace amid a soft market.

Kenanga Research pointed out that the stand-alone Café Mesra outlets in malls, office buildings and train stations were doing better given higher foot traffic, versus those located at petrol stations.

However, Café Mesra’s contribution to PetDag’s convenience division revenue “remained insignificant” currently, it added.

“We like PetDag due to its highly cash-generative business that translates into high capacity to pay dividends, its strong balance sheet with a sizeable war chest of RM2.8 billion, and growing convenience division revenue on stronger demand for Café Mesra.

“However, we are concerned over the long-term prospects for its retail business, on the back of EV adoption,” said Kenanga Research. It has a “market perform” call on PetDag.

Among the risks to its call include volatility in PetDag's product prices, which translates into margin volatility, lower fuel demand due to a domestic economic slowdown, and low fuel demand stemming from a slowdown in air travel.