Petronas Dagangan; Fully Valued; RM27.20
Price Target: RM19.70; PETD MK

Effective today, the government has increased the retail selling price by 20 sen a litre for RON95 petrol (+10.5% to RM2.10) and diesel (+11.1% to RM2.00). This comes as the government moves to rationalise subsidies to reduce the country’s fiscal deficit (both RON95 petrol and diesel are subsidised under the Automatic Pricing Mechanism or APM).

We do not think there will be any material impact on Petronas Dagangan (PDB) with demand likely to recover following an initial kneejerk reaction. Based on past experience, when the prices of RON95 and diesel were last raised by 5 sen a litre (to RM1.90 and RM1.80 respectively) in Dec 2010, PDB subsequently recorded overall sales volume growth of 6.1% y-o-y (to 3.5m litres) in the Oct-Dec 2010 quarter and 3.0% y-o-y (to 3.4m litres) in the Jan-Mar 2011 quarter.

The higher retail prices for fuel products (RON 95 and diesel) should boost revenue (assuming similar sales volume) for retail oil operators like PDB, although there would be no impact on earnings as they earn a fixed absolute margin (5 sen / litre) under the APM regime. We maintain our Fully Valued call on PDB with RM19.70 TP based on 18x FY14 PE.

Source: HwangDBS Research - 3 Sep 2013