• 9M23 core net profit of RM771m made up 81% of our earlier FY23F forecast, above expectations on higher-than-expected margins at its retail arm.

• Reiterate Reduce due to the uncertainty over how significantly the planned reduction in fuel subsidies in 2024F will affect demand at the fuel pump.

• We raise our DDM-based TP to RM17.79 as we rollover to end-CY24F.

Jet Fuel MOPS Increase in 3Q23 Hurt PDB’s Bottomline…

3Q23 core net profit of RM193m was 30% lower qoq, mainly because the commercial arm was adversely affected by a 22% qoq rise in the Mean of Platts Singapore (MOPS) jet fuel prices during 3Q23; PDB typically passes on jet fuel MOPS fluctuations to its airline customers with a lag, resulting in a 42% qoq decline in the commercial division’s EBIT. The retail division’s EBIT in 3Q23 also fell by 25% qoq, due to opex increases, although PDB did not explain further in its Bursa release. Conversely, the convenience EBIT rose 23% qoq in 3Q23 due to higher revenues, but this segment is small in the overall scheme. On a yoy basis, PDB’s 3Q23 core net profit fell 32%, mainly because commercial EBIT fell 70% yoy. During 3Q22, jet fuel MOPS had declined 10% qoq, allowing PDB to book-in higher profits on its jet fuel sales as selling prices were adjusted downwards with a lag; by contrast, during 3Q22 jet fuel MOPS rose qoq. PDB declared a 3Q23 interim DPS of 20 sen (same as 3Q22), taking the 9M23 DPS to 53 sen (vs. 36 sen in 9M22).

…but We Expect a Sequential Rebound in 4Q23F

Jet fuel prices have so far in 4Q23F averaged at about the same level as during the immediately preceding 3Q23; this suggests that PDB will not suffer the lagged losses for jet fuel, and in fact, its pricing to the airlines will catch up. Hence, we have pencilled-in an EBIT of RM137m for the commercial arm in 4Q23F, vs. RM81m in 3Q23. For the retail arm, we have pencilled-in an EBIT of RM161m in 4Q23F, slightly lower than 3Q23’s RM168m, as PDB typically expenses catch-up maintenance costs into its 4Q results annually. We have pencilled-in DPS of 95 sen for FY23F (unchanged), DPS of RM1.05 for FY24F (up from RM1), and DPS of RM1.05 for FY25F (unchanged), representing payout ratios of c.95% and dividend yield of 4.6% next year.

The Magnitude of Subsidy Curtailment Is Key to Watch

The key potential de-rating catalyst is the likely introduction of a targeted fuel subsidy scheme. The government will start by rolling back diesel subsidies in order to remove the financial incentive for illegal smuggling into neighbouring countries and illegal use by businesses that are not entitled to subsidised diesel. The Central Database System (Padu), which identifies the individuals that are entitled to enjoy continued subsidies for RON95, will be ready by Jan 2024F, according to the government, and RON95 subsidy rollbacks could begin in 2Q24F, in our view. These measures could eventually hurt PDB’s volume growth. Upside risks include stronger-than-expected recovery in jet fuel demand as flights are progressively restored, and smaller-than-expected subsidy curtailment.

Source: CGS-CIMB Research - 23 Nov 2023