We returned from a site visit to PETDAG’s terminals in Kota Kinabalu feeling neutral, with our view on the stock largely unchanged. Post disposal of its working inventories, PETDAG’s earnings will no longer be exposed to inventory lag gains/losses, and will primarily be volume-driven. Meanwhile, pricing mechanisms have dragged its commercial segment for the past two quarters, but we expect this to stabilise in 2HFY22. Maintain MARKET PERFORM, with an unchanged TP of RM22.25.

Site visit to Kota Kinabalu. We went on a site visit to PETDAG’s fuel and LPG terminal in Sepanggar Bay, as well as its aviation terminal at Kota Kinabalu Airport. These terminals are used to receive, store, and distribute fuels, and handle more than half of the volumes served in Sabah – which is <10% of the total group’s volumes. Below are some of our takeaways from the visit:

1. No changes of operations post transfer of ownership of inventories to Petco. Recap that earlier in the year, PETDAG had completed the sale of its working inventories and deadstock in the storage tanks to Petco (another wholly-owned Petronas subsidiary), named as “project DOVE” internally. We now can verify that there are no changes operationally post completion of this ownership transfer. The fuels are still stored in PETDAG’s terminals, with PETDAG only assuming ownership of the inventories once the fuels have been loaded onto the trucks and sent out for delivery to the stations. Following the completion of project DOVE, PETDAG’s retail earnings will no longer be impacted by inventory lag gains/losses, and will primarily be volume-driven.

2. Pricing mechanisms dragged commercial segment into losses. We learnt that typically commercial clients use a “look-back” mechanism in determining product prices, which may vary from the spot prices. This has resulted in two consecutive quarters of losses in the past for its commercial segment, despite improved sales volumes. Do note that jet fuel products are homogenous across the various brands, and hence, competition is stiff within this space. That said, we expect performance from this segment to stabilise going into 2HFY22 given the easing of oil prices off its peak.

Overall, we returned from our site visit feeling neutral, with our view on the stock largely unchanged. As such, we made no changes to our forecasts.

Maintain MARKET PERFORM, with unchanged TP of RM22.25, based on DCF (WACC: 10%, TG: 1%). There is no adjustment to TP based on ESG for given a 3-star rating as appraised by us (see Page 5). Maintain MARKET PERFORM.

Risks to our call include: (i) removal of fuel subsidies, hurting fuel consumption, (ii) global recession hurting fuel demand, and (iii) resurgence of movement restrictions.

Source: Kenanga Research - 3 Oct 2022