It’s Finally Here!

The Malaysian government announced that it would float RON95 pump prices while targeted subsidies would be given to Bantuan Sara Hidup (BSH) recipients in Peninsular Malaysia. The structure remains unchanged in East Malaysia with the RON95 price fixed at RM2.08, as subsidies are smaller and higher number of diesel vehicles on the road. PetDag’s retail sales volume mix is 80:20 in Peninsular Malaysia and East Malaysia. This announcement is earnings neutral, but will likely have a positive effect on cash flow. The targeted subsidies may spur some spending towards PetDag due to the better loyalty points programme offered. We maintain our HOLD rating and DCF-derived 12- month target price of RM23.95.

RON95 prices to be floated in the Peninsular; subsidies for BSH recipients

Effective Jan-2020, targeted fuel subsidies will be provided to car and motorcycle owners (below 1,600CC and 150CC unless aged over 10 years and 7 years respectively) based in Peninsular Malaysia under the BSH. Each recipient will receive RM120 for car and RM48 for motorcycle owners, every 4 months, limited to one vehicle per recipient. Meanwhile, the structure in East Malaysia is unchanged, with the RON95 price fixed at RM2.08 as government subsidy in that region is relatively lower due to different APM mechanism and higher number of diesel vehicles on the road as compared to petrol vehicles. The targeted subsidy scheme is expected to benefit 2.8m citizens in Peninsular Malaysia, translating to 8.6% of the total population.

Subsidy Removal No Impact on Earnings, Only on Cash Flow

The subsidy removal will not have any positive earnings impact, but will result in better cash flow from shorter receivable days. PetDag will be able to enjoy the benefit of a full payment directly from consumers under the managed float system, as compared to the current system whereby subsidy receivables by the government are paid with a two-month lag.

Could There be a Shift in Retail Volume?

We believe consumer spending may see a shift towards PetDag, which currently offers the highest fuel rebates through its loyalty card programme. As fuel becomes more expensive, consumers are likely to seek more attractive rebates to lower their cost of living. Nevertheless, we believe any incremental volume growth from grabbing market share would likely be small.

Source: Affin Hwang Research - 8 Oct 2019