• We expect commercial sales volume to grow especially for the marine segment (ahead of IMO 2020), leveraging on RAPID’s competitive edge to supply low sulphur bunker fuels.

• The shift to fixed retail fuel pump price is positive for PDB’s retail sales volume and, possibly, consumer sentiment which could boost its non-fuel income, in our view.

• We raise PDB’s FY18-20F earnings forecast by 11-24% on higher sales volume for both the retail and commercial segments.

• Upgrade to BUY (from HOLD) with a higher DCF-derived TP of RM30.00 (from RM26.60) which implies 26.3x FY19E PE.

Encouraging commercial sales volume growth

Commercial segment sales volume growth was encouraging amidst higher demand for various commercial products such as jet fuel, diesel, fuel oil and bulk LPG. In 1Q18, the segment underpinned the 3% total volume growth to more than offset falling mogas and retail diesel sales volume.

Bright prospects ahead for the commercial segment

We also expect bunkering activities to provide further boost to sales volume as we note the OSV market is bottoming out. Additionally, PDB could grow its market share in the marine segment upon completion of the RAPID refinery which avails PDB with low sulphur fuel ahead of the IMO 2020 implementation.

Fixed retail fuel price positive to PDB

We think fuel consumption will increase as consumers start to adjust spending pattern to fixed fuel price. Fuel pump price has been kept unchanged since 22 Mar 2018 and management noted that this has led to some retail sales volume growth. Coupled with the GST abolishment which should fuel the feel-good factor towards the new government, we expect non-fuel income to increase in tandem with improved consumer spending.

Earnings upgrade on higher sales volume

We raise our earnings forecast for FY18/FY19/FY20 by 11%/17%/24% respectively as we anticipate a turnaround in sales volume driven by the commercial segment and higher non-fuel income from the retail segment. We assumed 2% (from: 0%) annual sales volume growth over the next 3 years.

Upgrade to BUY; TP RM30.00

We upgrade PDB to BUY (from HOLD) with a higher TP of RM30.00 (from RM26.60) derived using DCF methodology. This is based on a 7.5% WACC and long term terminal growth rate of 1.5% which implies 26.3x FY19E PE.

Source: BIMB Securities Research - 9 Jul 2018