• We upgrade PetDag to BUY (from HOLD) as we see it as one of the leading proxies to Malaysia’s post-Covid recovery theme.

• We think it could garner better margin from the disposal of its working inventory to PETCO as it could contribute to efficiency gains through shorter inventory days.

• We raised our FY21F/FY22F/FY23F earnings forecast by 8%/10%/11% respectively as we impute higher gross profit per volume assumption.

• We upgrade our DCF-derived TP to RM22.90 (from RM18.20), which implies 27x FY22F P/E. We think this is fair as we expect PetDag’s earnings to be less volatile moving forward, hence improving its earnings visibility and dividend payout to shareholders.

Proxy to post-Covid recovery

We upgrade our recommendation on PetDag to BUY as we think it could be one the leading proxies to Malaysia’s post-Covid recovery theme. Despite current uncertainties, we remain optimistic with the country’s oil demand recovery path as vaccine rate continues improving. For comparison, Malaysia’s vaccine rate stands at 20%, which is a 4-months lag behind that of the US. Given that US oil demand has almost returned to pre-Covid level now, we think a strong recovery in local oil demand over the next 6 months is likely.

Efficiency gains from new operating model

We think PetDag could garner better margin from the disposal of its working inventory and deadstock (un-pumpable inventory) to PETCO as it will generate more efficiency gain from lower inventory days, in our view. Recall that management has reduced its inventory days by 3 days to 10 days following sharp decline in oil price in FY14. This has resulted in higher gross profit per volume (GPPV). We estimate that GPPV was 13.8% higher in FY20 as compared to FY14 despite facing similar weakness in oil price.

Raise earnings forecast

We raised our FY21F/FY22F/FY23F earnings forecast by 8%/10%/11% respectively as we expect the shorter inventory days will contribute to efficiency gains and higher gross profit per volume.

Upgrade to BUY; TP RM22.90

We upgrade PetDag to BUY (from HOLD) with a higher TP of RM22.90 (from RM18.20) derived using DCF methodology. We believe our BUY recommendation is justified as we expect earnings to rebound driven by oil demand recovery supported by stronger margin moving forward. Currently, the stock trades at a bargain of 21x FY22F P/E which is near to -1SD of the past 8-year forward P/E band.

Proxy to post-Covid recovery theme

Recovery in Petdag’s sales volume hit a snag with extended Movement Control Order (MCO) imposed by the government in order to curb Covid-19 spread. To recap, after recording a strong recovery in 3QFY20, sales volume declined in two subsequent quarters to 2.8bn litres which is still c.30% lower than pre-Covid sales level (Chart 1). Taking into account another round of MCO that was imposed since 2QFY21, this is behind our initial forecast, making up only 20% of our FY21 full year estimate.

Source: BIMB Securities Research - 9 Jul 2021