PETDAG’s outlook is subdue on the back of elevated opex largely in digitalisation, tepid volume growth and volatility in margins of the jet fuel trade under its commercial division. Typically, it experiences a margin squeeze in a rising crude oil price scenario and vice versa. We maintain our forecasts, TP of RM22.40 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. We understand that its elevated opex seen thus far in FY23F will likely spill over to FY24F on its digitalisation initiatives (the SETEL app). It confirmed that the ramp-up in its digitalisation efforts across the group had capped earnings despite higher sales volumes in 9MFY23.

2. We understand that for PETDAG’s sale of jet fuel to the aviation industry under its commercial division, its customers lock in with PETDAG a certain volume over a certain period of time at a predetermined price. As such, under a rising crude oil price scenario, PETDAG which holds very limited stock, will have to pay more for jet fuel to be supplied to its customers, resulting in margin squeeze, and vice versa. This explains the poor margins at its commercial division in 3QFY23 during which crude oil was on an uptrend.

3. The group has also drawn down RM1bn sukuk in 3QFY23 and explained that the facility is mainly to mitigate working capital risks which could arise in uncertainty of subsidy receivable collection. This makes sense to us as 50% of the group’s sales volume is under the government subsidy scheme and in recent years subsidy receivable balances have increased (RM5.2b in 3Q23 from RM4b in 3Q22).

4. PETDAG updated that they currently have 45 DC and 2 AC EV chargers installed along major and inter-city highways. We believe this would be ramped up further in 2024 but profitability of the chargers is not disclosed. At this juncture, the group only leases out their spaces in petrol stations to Gentari and other operators for EV chargers hence capex of the chargers would not be borne by PETDAG.

Forecasts. Maintained

Correspondingly, we maintain our DCF-based TP (WACC: 10%; TG: 1%) at RM22.40. 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 - 27 Nov 2023