Neutral on Higher Dealer Commission

The government announced that dealer commissions for RON95 and diesel will be raised by 2.81sen and 3sen per litre, respectively. This revision is beneficial to petrol station dealers, but earnings neutral to Petronas Dagangan as company margin remains unchanged. We reiterate our HOLD call with an unchanged target price at RM28.30.

A Win for Petrol Dealers

The new Pakatan Harapan (PH) government has raised the dealer (petrol station operators) commission for the sales of RON95 by 2.81sen/litre, from 12.19sen to 15sen; and for diesel sales, by 3sen/litre from 7sen to 10sen. This is the first revision since 2008, which would benefit the petrol dealers

providing a better margin of safety on the weekly fluctuation in product prices, cetirus paribus. On PETD’s standpoint, this is largely earnings neutral as company margin remains fixed at 5sen/litre and 2.25sen/litre for MOGAS and diesel, on the assumption the alpha (α) remains fixed.

RON95 and Diesel Pump Prices Back to Weekly Float

RON95 and diesel prices have been kept unchanged since March 2017, prior to the GE14 election last year. The government will resume floating the retail pump prices on a weekly basis based on the APM mechanism, but will cap RON95 price at RM2.20/litre in the event if global oil prices recover. Prices will be announced each Friday and will take effect on Saturday. In view of the recent decline in global oil prices, current RON95 price will be reduced by RM0.17/litre to RM1.93 (from RM2.20). Meanwhile, the new diesel price is set lower at RM2.04 (from RM2.18) for this week.

Government Freebies Receive Good Response

On a separate note, according to a press article, the newly introduced RapidKL's unlimited travel passes (My100 and My50) has received over 20,000 registrations on the first day. We believe this would likely result in further pressure on the already challenging retail volumes, as the daily cost saving is greater than the previous SMART Packages 7 weekly and SMART 30 Monthly. Hence, this would entice working class to commute more.

Maintain HOLD

We Make No Changes to Our Earnings Forecast. We Reiterate Our HOLD rating and DCF-based target price unchanged at RM28.30 (WACC: 9.2%, 3% terminal growth), which implied a 27x FY19 PER.

Upside and downside risks to our call include swing in retail and commercial sales volume. Downside risk could also arise from any unforeseen higher-than-expected spending for the current stations infrastructure upgrading.

Source: Affin Hwang Research - 7 Jan 2019