Although its share price has retreated 36% from the peak, PETDAG’s valuation is still not compelling enough to warrant a BUY call. Nonetheless, we believe that this index-stock will remain as core-holding for investors’ portfolio benchmarking purposes. In addition, the share price downside is likely to be capped by steady earnings growth as the fear of declining jet fuel demand is overdone since it makes up only c.10% of group’s revenue. Being the leading marketer of downstream petroleum products in Malaysia, its earnings will mirror the country’s GDP growth which we expect to grow at 4.5% CAGR over FY13-FY16E. PETDAG offers decent dividend payment, yielding at 2.6%-3.1% net. As such, we are initiating coverage on PETDAG with a MARKET PERFORM call with a price target of RM19.64/share. The leading marketer of downstream petroleum products, with market share of c.42%.

Petronas Dagangan Bhd (PETDAG) operates the largest retail station network in Malaysia with >1,000 Petronas petrol stations. PETDAG is the market leader in commercial (market share: c.68%) and LPG (c.57%) segments in Malaysian and No. 2 in both retail (c.3%) and lubricants (c.13%) segments. In 2012, PETDAG ventured overseas with presence in Thailand (lubricant), Vietnam (LPG) and the Philippines (lubricant and LPG).

Still expect to trade at a premium. Share price has retreated 36% so far from the peak of RM31.82 on 31 Dec 2013, no thanks to the two MAS air disasters within the last six months. Even then, PETDAG is still trading at 24x PER currently, which is at a 55% premium to FBMKLCI as opposed to 150% premium from the peak. It has been trading at a premium since Feb 2011 when the company started its high dividend payout of 89%-95% for three years from below 60% prior to that. The question now is how much premium does investors are willing to pay for the stock. Historical data shows PETDAG was traded at 79% premium since Feb 2011, 89%, 69% and 50% premiums for 3-year, 4-year and 5-year means.

A GDP-rate earnings growth with good dividend payout ability. While PETDAG is expecting a weak FY14E due to higher operating cost, stronger business volumes are set to drive its earnings higher, to be led by retail segment. We expect PETDAG’s earnings to grow at 4.5% 3-year CAGR in FY13-FY16E. Although gone are the days of distributing exceptionally high dividend payout of 85%-94%, we still expect generous payout of 70% over FY14E-FY17E given its strong operating cash flow generating ability of above RM1b a year. This implies a decent net yield of 2.6%-3.1%. This is also backed by a minimum 50% dividend payout policy.

Initiating coverage with MARKET PERFORM. Although we like its business model and generous earnings payout, we believe PETDAG is fairly priced at the moment, albeit share price has retreated 36% from the peak. Even then, PETDAG is not a stock to be ignored given its Petronas parentage status and status as an index-stock. In our opinion, it will remain as investor’s core-holding for portfolio benchmarking. As such, we are initiating coverage on PETDAG with a MARKET PERFORM rating with a price target of RM19.64/share, which implies CY15 22.7x PER and a c.50% premium to the market valuation.

Source: Kenanga