PETDAG’s 1HFY23 results tracked our expectations but trumped consensus as robust volumes more than offset higher opex. Stable price trends for commercial products led to the YTD profit recovery. Moving forward, we remain cautious of the impact of targeted subsidies to volumes. We maintain our forecasts, TP of RM24.90 (based on DCF) and MARKET PERFORM call.

Met our expectations. Its 1HFY23 core net profit of RM584m was in line with our expectations but surpassed consensus– coming in at 47% and 63% of our full-year forecast and the full-year consensus’ estimate, respectively.

Aided by stable price trends. YTD topline growth (+3%) was mainly driven by higher sales volume (+11%) for both the retail (+8%) and commercial (+15%) segments. Meanwhile, the surge in bottomline (>2x) was primarily attributed to the commercial segment due to stable price trends for Jet A1 and diesel products. To recap, 1HFY22 was hit by a steep increase in oil price and volatility, which led to higher product cost, and hence margin compression.

The above more than offset drag from higher opex emanating from: (i) increased costs for repair and maintenance at the commercial segment, and (ii) hike in transportation costs at the retail segment.

QoQ dragged by higher opex. However, bottomline declined on sequential basis in spite of higher volumes (+6% QoQ). This was attributed to higher opex due to: (i) repair and maintenance, and (ii) advertising and promotions.

Possible setback from targeted fuel subsidies. Moving forward, as early as next year, we are cautious of the possibility that volumes may suffer a setback. This is given the government’s plans to gradually phase out the blanket subsidy system in favour of targeted subsidies. Hence, rationalization of petrol and diesel subsidies for high income households may cause a knee-jerk reaction in consumption patterns. Furthermore, recent improvements in infrastructure, rolling stock, coverage, and connectivity of public transport have enhanced its appeal as a viable alternative. Moreover, this is boosted by sustained government subsidies such as the RM50 monthly pass for Prasarana Bhd’s rail and bus services in Klang Valley.

Forecasts. Maintained

Maintain MARKET PERFORM with unchanged TP of RM24.90 based on DCF valuation (WACC: 10%, terminal growth: 1%). There is no change to our valuation based on ESG given a 3-star ESG rating as appraised by us (see Page 5).

We like PETDAG due to: (i) its highly cash generative business that translates to high capacity to pay dividends, (ii) its strong balance sheet with a sizeable war chest of RM2.8b, and (iii) its thrust in expanding its electric vehicles charging network which enhances its ESG profile. However, we are concerned of downside risk to volumes given the government’s plans to rationalize fuel and diesel subsidies. Maintain MARKET PERFORM.

Risks to our call include: (i) the full removal of fuel subsidies for all income brackets, (ii) the global economy slips into recession and derails recovery of international air travel, and (iii) muted resurgence in tourist arrivals.

Source: Kenanga Research - 29 Aug 2023