We took Petronas Dagangan (PETD) on a non-deal roadshow to meet investors in Tokyo. Investor’s interests were mainly centered on the possible fuel market deregulation after the change in government, as well as the group’s growth outlook. In our view, the deregulation of pump prices will be unlikely and their strong war chest would allow them to further expand into the burgeoning non-fuel segment. Maintain our HOLD rating and target price at RM29.00.

Retail Sales Volume Growth Looking Flattish

Instead of expanding aggressively in new petrol stations as in the past, the strategy moving forward is to focus on expanding in strategic locations and attracting traffic flow into the existing stations. Potential future expansion might be skewed towards dealer own, dealer operate (DODO) as compared to company own, dealer operate (CODO) model due to better returns on investment. With a rising proportion of electric vehicles (EV) on the road, PETD has installed 55 charging stations in selected stations, deriving rental income from GreenTech for the lease of floor space. The installation of EV charging stations are now more for attracting station flows.

Deregulation Likely Put on Hold, Moving to Targeted Subsidy

Current pump price will unlikely be deregulated over the near-term as we believe this would decrease the households’ disposable income. In addition, management reaffirmed our view on the possibility of a targeted subsidy for the B40 income group in the upcoming Budget 2019. While still unsure over the method of implementation, this will help to improve PETD’s cash flow, if materialize. Assuming US$80/bbl Brent oil in 2019, and MOPS price at an $11 premium, the government is effectively subsidizing RM0.44/litre for RON95, totalling RM7.2bn. We also noted that the recent tax holiday has resulted in a slight delay in subsidy payment.

Commercial Segments Seeing a Few Positive Signs

The regional airlines routes expansion are expected to help drive higher JetA1 fuel demand, which makes up 40% of total commercial segment revenue. However, this will be partly offset by the better efficiency of longhaul fleets. Diesel demand is also expected to improve driven by heightened O&G upstream activities in view of the recent recovery in oil prices. The RAPID refinery, which is targeted to commence operation in 1Q19, will also increase the group’s competitiveness driven by better product offering and more cost advantages.

Partner With Grab to Mitigate the Volume Loss From Public

E-hailing penetration rate in Malaysia is projected to increase from 4.5% in 2017 to ~6.5% in 2020. This will gradually reduce the frequencies of refuelling from road users and result in lower retail volume. PETD has recently tied up with Grab to tackle this problem, offering 5x points for active Grab drivers through Mesra card, as compared to the usual 3x.

Targeted New Marketing Channel in LPG and Lubricant Space

Both the LPG and lubricant businesses are still relatively underpenetrated. Management has recently introduced a new distribution channel for the household LPG cylinders by selling it at petrol stations and has received good sales response. Meanwhile, management is still aggressively penetrating into lubricant businesses, which have the best margins among all its businesses.

Long-term Strategy to Increase Non-fuel Income

For its long-term strategy, PETD intends to increase their non-fuel to 30% of total revenue. The group has been focusing on increasing the revenue per square foot of their assets by collaborating with coworking space, Common Ground and introducing more of its own brand items (ie: mainly consumables) in an effort to drive up their non-fuel margins. PETD is currently mainly only deriving royalty income from the dealers from the products sold. We believe for PETD to achieve the 30% target, it may likely need to switch from the current royalty model and/or embark a massive capex spending programme for expansion.

No Changes in Our Earlier Assumptions

We make no changes to our earnings forecasts as the guidance shared to investors were in line with our earlier assumptions. We have factored in a 1% volume growth for retail, commercial and LPG at 3% and 5% for the lubricant segment. We believe the target to grow non-fuel income to 30% of total revenue is still at a rather early stage.

Maintain HOLD; TP: RM29.00

Given the lack of near term catalyst, we maintain our HOLD rating on the company with our DCF-derived target price unchanged at RM29.00, derived using DCF methodology, which implies a 27.5x forward FY19 PER. Its dividend yield of 3% at current level also looks fair. Risks to call: entry of more ride hailing companies, more aggressive campaigns and promotions by e-hailing companies, gradual completion of more train services.

Source: Affin Hwang Research - 29 Oct 2018