PETDAG is positioning itself to adapt to energy transition trends via: (i) potential development of a bio-refinery hub that produces sustainable aviation fuels, and (ii) ramp-up in installation of electric vehicle (EV) charging infrastructure. Meanwhile, we remain cautious of the impact of targeted subsidies to PETDAG’s volumes. We maintain our forecasts, TP of RM24.90 and MARKET PERFORM call.

We came away from PETDAG’s post-results briefing yesterday feeling largely neutral on its near-term prospects. The key takeaways are as follows:

1. PETDAG is unperturbed by recent news flow and industry talk on the potential entry of new competitors in the domestic retail market. This includes the possibility of TotalEnergies and Saudi Aramco setting up retail fuel stations in Malaysia. This is because PETDAG is fairly confident that its established brand and infrastructure will enable it to maintain a strong footing and defend its market share. In the company’s view, the retail fuel business has high barriers of entry given the need for substantial long-term investments to create economies of scale. This includes large capex outlay to build a vast network of stations and fuel terminals, etc.

2. The company is positioning itself to leverage on the newly launched National Energy Transition Roadmap by the government. This is mainly via two major initiatives, that include: (i) development of a bio-refinery hub, and (ii) installation of more EV charging infrastructure along major highways in Malaysia. With regards to the bio-refinery hub, PETDAG is hopeful to achieve final investment decision on this project within the next few years. This hub is envisaged to produce bio-based products, including sustainable aviation fuels (SAF).

3. The group is sanguine that volume traction for its retail segment (+8% YTD) will sustain in the near-to-medium term. This is mainly underpinned by the unwinding of work-from-home policies for corporations in the post-pandemic era. Based on the company’s observations, implementation of hybrid work policies have resulted in the return of workers to offices. Moreover, the number of vehicles on-the-road has also increased following the delivery of new vehicles ordered during the pandemic.

Forecasts. Maintained.

We also maintain our TP of RM24.90 based on DCF (WACC: 10%, TG: 1%). There is no adjustment to our TP based on ESG for given a 3-star rating as appraised by us (see Page 4).

We like PETDAG due to: (i) its highly cash generative business that implies high capacity to pay dividends, (ii) its strong balance sheet with a sizeable war chest of RM3b, and (iii) expansion of its EV charging network which enhances its ESG appeal. However, we are concerned of downside risk to volumes given the government’s imminent 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 and business travel.

Source: Kenanga Research - 30 Aug 2023