Petronas Dagangan’s strategy moving into 2019 will see the group focus on upgrading its assets in order to incorporate its new e-wallet platform, SETEL. This will likely result in higher capex, as well as higher opex for station refurbishment. 9M18 sales volume was down 1% mainly due to weaker Jet-A1 demand. We reiterate our HOLD call but lower our TP to RM28.30 on balance sheet adjustments.

Ytd Sales Volume Was Down 1%

The retail sales volume increased 3% qoq and 2% yoy, due to a purchase shift from commercial diesel customers to subsidized retail diesel. The commercial volume has seen a 7% increase qoq driven by higher Jet-A1 demand following the holiday and haj season; however, volume declined 9% yoy due to improved aircraft fuel-efficiency. Sales volumes of liquefied petroleum gas increased by 3% qoq following new marketing channels selling via petrol stations. The same could not be said for the lubricants which saw 6% lower volume qoq due to a decline in bulk purchases. Overall, 3Q18 also saw opex increasing to RM534.5m (+7% qoq, +6% yoy) mainly due to more aggressive promotional and advertising campaigns as well as more refurbishment, repair and maintenance of its existing stations.

Introducing a New E-wallet – SETEL

In a push towards digitalization, PetDag will be releasing a new e-wallet, SETEL, which will be integrated with its Mesra program. This would allow users to purchase fuel seamlessly through their smart phones and allow the group to utilize its vast user database for targeted marketing of Mesra products. PetDag is currently running a pilot program at 40 stations with the aim to double it by Dec-18, targeting more than 200 stations by end-1Q19. The company is guiding for 2019 capex to be higher at RM450m vis-à-vis RM300m in 2018 as it upgrades its station infrastructure (software and hardware) to incorporate SETEL.

Maintaining HOLD

We did some balance sheet adjustments, mainly to reflect the longer receivables days and renewed capex guidance. As a result, our 12-month DCF-based target price is lowered to RM28.30 (from RM29). There could be some downward pressure upon earnings in the upcoming quarter due to lower MOPS prices, resulting in some inventory losses. Maintain HOLD. Upside and downside risk to our call include swing in retail and commercial sales volume. Downside risk could also arise from any unforeseen higherthan-expected spending for the current stations infrastructure upgrading.

Source: Affin Hwang Research - 29 Nov 2018