Petronas Dagangan (PDB), the marketing arm of national-owned PETRONAS is a well-established brand. It runs over a thousand petrol stations by a name known to many. We like PDB’s business model due to its high barriers to entry, established branding and more importantly it operates a cash-cow business. We initiate coverage with a HOLD call and target price of RM29.00, derived using a DCF valuation.

Cash-cow Retail Business

With a vast distribution network and more than 1,000 petrol stations spanning across Malaysia, PDB has firmly established itself as one of the leading players in the downstream petroleum retailing segment with a 30% market share. We project a 1% volume growth for the retail business as we expect sales volume to come under pressure from better car efficiencies, wide use of public transportation and growing popularity of e-hailing services. While the retail market growth is only at low single digit, this business unit remains a cash-cow business, generating strong operating cash flow (OCF) under the APM structure.

Growth Should Come From the Commercial Segment

In our view, growth will likely come from the lubricant segment for which PDB’s market share is now relatively low at 20%. We project a 5% sales volume growth for this business as PDB adopts a more aggressive sales strategy. The LPG market is relatively mature with PDB enjoying a 50% market share with 3% projected sales growth. Its market share in the commercial segment is around 60%, and we expect it to grow by 3% on the back of increase in airline fleet capacity and route expansion. Factoring in the above, we expect a 6.1% and 3.4% EPS growth for FY19-20E.

Long-term Cash Flow and Dividend Payout Intact

While the retail price of RON95 and diesel has been fixed at RM2.20/litre and RM2.18/litre respectively, effectively reverting to the subsidy framework, we expect PDB to continue generating a strong FCF of RM1bn adding on to its huge cash reserves.

Initiate Coverage With a HOLD Rating and TP of RM29.00

We like PDB for its high barrier to entry business, well established brand name and a strong backing from Petronas. We initiate coverage with a HOLD as valuation looks fair at 25x FY19E PER and 3% yield. With the recent fuel subsidy implementation, cash flow might pose a near-term risk on any potential delays in subsidy receivables.

Source: Affin Hwang Research - 6 Sept 2018