• The government raised petrol dealers’ commission for diesel by 3sen/liter and petrol by 2.81sen/litre in early 2019. While this led to higher gross profit and opex it had no impact to earnings.
• Beginning 2020, the blanket subsidy for RON95 will be removed and retail price will be floated to market price. We expect no interruption to operation as dealers are in better position to cope with higher working cap needs given higher commission.

• We maintain our earnings estimates for now as we expect the blanket subsidy removal would have minimal impact to sales volume in view of depressed crude oil prices.

• BUY with an unchanged DCF-derived TP of RM26.00 which implies 27x FY19F P/E. The stock makes a compelling investment case in view of its defensive attributes.

Impact of hike in dealer commission

The government had raised petrol dealers’ commission in early 2019 which should translate to a more robust working capital management for the dealers (Chart 1). For PetDag, this saw higher revenues and gross profits as MFRS15 accounting standard recognises commissions in its revenues; this is then expensed as selling and distribution costs which negates any impact to the bottomline.

The return of managed float system

With the impending reintroduction of the managed float system in 2020 and targeted fuel subsidy (Table 1), we expect to see minimal impact to sales volume. The tepid outlook for crude oil prices should translate to manageable volatility in fuel pump prices, in our view. We also expect dealers to be in better shape to cope with the rising working capital requirement given higher commissions. According to the Petrol Dealers Association of Malaysia (PDAM), 50 dealers had quit the industry when the weekly float price mechanism was first introduced back in 2017.

Maintain earnings forecast

We retain our earnings forecast for now as we expect the blanket subsidy removal to have minimal impact to sales volume in view of depressed crude oil prices. In near term, we expect PetDag to deliver stronger earnings in 3Q19 as it benefits from jump in MOPS price in Sept 2019 due to the attack on Saudi Aramco facilities.

Reiterate BUY; TP RM26.00

Maintain BUY with an unchanged DCF-derived TP of RM26.00, implying 26.7x FY19F P/E (Table 2). We believe fundamentals are intact; with stock price trading near its -1SD P/E band (Chart 2), we believe the stock makes a compelling investment case owing to its defensive attributes.

Source: BIMB Securities Research - 10 Oct 2019