PETDAG’s 9MFY23 results disappointed on unfavourable product price movements in 3QFY23. However, its 9MFY23 core net profit rose by 38% YoY on the opposite side. These speak for its earnings volatility which renders volume growth less meaningful. Not helping either is the gradual adoption of EVs. We cut our FY23F net profit forecast by 11%, reduce our TP by 10% to RM22.40 (from RM24.90) but maintain our MARKET PERFORM call.

Slight below. Its 9MFY23 core profit of RM781.8m (excluding RM6.2m impairment of receivable, RM7.9m impairment on PPE, RM9m forex loss, RM2m inventory write down and RM3.9m receivable write back) came in at 74% and 77% of our full-year forecast and the full-year consensus estimate, respectively, However, we consider the results below expectations, expecting a weak 4Q due to lumpy opex typically incurred during the quarter. The variance against our forecast came largely from unfavorable product price movements in the commercial division coupled with high retail opex. DPS of RM0.20 was declared, below expectations.

Commercial and convenience drive YoY earnings. Its 9MFY23 top line was flattish as strong sales from the retail division revenue (driven by a higher sales volume) and the convenience division (underpinned by strong demand at Mera Stores and Café Mesra), were offset by a weaker showing from the commercial division (on lower ASP). However, its core profit jumped 38.2% YoY on improved margins at both the commercial unit (driven by favourable jet fuel price movement) and the convenience unit (due to higher margins for new Café Mesra).

Margins down QoQ. The group’s topline improved by 11.3% QoQ as all three divisions reported stronger revenue particularly for the commercial division due to increase in demand for jet fuel. Its bottomline, however, dropped 29.7% due to unfavourable product price movements coupled with high opex at the retail division.

Flattish outlook in medium term. We believe the post-pandemic recovery in product volumes (across all divisions) has run its course. Moving into FY24, volume overall is expected to grow at a slow pace (4%) which is closer to the average historical growth of its products. That aside, the gradual adoption of EVs in Malaysia may also pose a long-term threat to the group’s conventional retail business (driven by diesel and gasoline sales).

Forecasts. We cut FY23F earnings by 10.6% to account for lower retail and commercial division EBIT margins but held our FY24 forecast.

Correspondingly, we reduce our DCF-based TP (WACC: 10%; TG: 1%) by 10% to RM22.40 (from RM24.90). 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) growing convenience division revenue on stronger demand for Café Mesra. However, we are concerned of downside risk to its retail business long-term volumes due to impending EV adoption. Maintain MARKET PERFORM.

Risks to our call include: (i) fuel subsidy rationalisation, hurting demand, (ii) the global economy slips into a recession and derails recovery of international air travel, and (iii) Slowdown in the local aviation sector.

Source: Kenanga Research - 24 Nov 2023