We hosted a non-deal roadshow for Petronas Dagangan (PetDag) management in Thailand. As retail volume is expected to grow at a mere 1% in FY19, the strategy moving forward would be to expand its non-fuel revenue in the long run. With global oil price trend looking weak for the time being, we cut our earnings forecasts to factor in the likelihood of an inventory lag loss, and cut our DCF-based target price to RM24.60 (from RM26.20). Maintain HOLD.

Malaysian Industry Growth Lagged Behind Thailand’s

With PTT Oil and Retail (PTTOR) expected to be listed on the STI next year, clients were generally interested in understanding the retail market dynamics in Malaysia as a comparison. From what we gathered, Thailand’s retail fuel volume is expected to grow by 2–3% compared with 1% in Malaysia in 2019 in the best-case scenario. PetDag maintains its guidance of expanding by building 10-15 new stations moving forward.

Long-term Target: to Grow Non-fuel Income to 30%

To negate the inevitable retail volume decline (partly due to cars being more efficient) and to sustain its longer-term growth, PetDag is in the midst of formulating a business strategy to grow its non-fuel income, which is expected to be announced by end-2019. The group aims to grow its non-fuel income from the current 10–12% of total retail profit to 30% over the next 3 years. This could be achieved by potentially branching into the F&B business (similar to Café Amazon found in PTT gas stations). PetDag could follow PTT’s strategy by replacing its current own-brand Kedai Mesra and partner with independent convenience stores (PTT has an exclusive arrangement with 7-11). This could help accelerate the growth of the nonfuel segment as PetDag is currently only deriving royalty income from sales at convenience stores currently managed by petrol station dealers.

Buoyed by High RM3.2bn Cash Pile

We expect PetDag’s FY19-20 capex spending to remain high at RM450m as it upgrades its current stations, opens new stations and expands its digitization initiative. Capex is estimated to normalize to the RM200–300m level from FY21E onwards.

No Near-term Catalyst, Maintain HOLD

We cut our FY19E EPS by 7% to factor in the weak oil prices from May 2019, leading to a potential inventory lag loss, and reduce FY20-21E EPS by 4% to reflect some working capital adjustments. We maintain our HOLD call with a lower DCF-based 12-month target price of RM24.60.

Source: Affin Hwang Research - 9 Aug 2019