PETDAG’s system is all set for the implementation of diesel subsidy rationalisation. It does not expect the rationalisation to hit its diesel sales volumes given diesel being an essential fuel item. It is growing its Café Mesra outlets at a more measured pace amidst a soft market condition. We maintain our forecasts, TP of RM22.40 and MARKET PERFORM call.

We came away from meeting with PETDAG’s largely neutral on its nearterm prospects. The key takeaways are as follows:

1. PETDAG’s system is all set for the implementation of diesel subsidy rationalisation. It does not expect diesel subsidy rationalisation to hit its diesel sales volumes given diesel being an essential fuel item. This is also evident from historical data during the floatation of petrol and diesel prices in 2019, which showed no material impact on PETDAG's retail sales volumes.

2. The company does not expect a substantial earnings contribution from EV charging in FY24, given the early stage of the EV market. Conversion of Alternating Current (AC) chargers to Direct Current (DC) chargers is underway to decrease the average charging time for EV users. With 20 available AC charger stations, PETDAG's partner, Gentari, will increase capacity in the coming years. PETDAG will earn income through fees paid by Gentari or profit-sharing arrangements, with no direct operation of the charging stations.

3. In 2023, PETDAG added 60 Café Mesra outlets, including kiosks, in Peninsular Malaysia, bringing the total to 100. Looking forward, it will grow the franchise at a more measured pace amidst a soft market condition. An interest point to note is the stand-alone ones (i.e. those not attached to its petrol stations, but located in shopping malls, office buildings, LTR/MRT stations and terminals) are doing even better given higher foot traffic. Nonetheless, Café Mesra’s contribution to its convenience division revenue remains insignificant at present.

Forecasts. Maintained

Valuations. 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 4).

Investment case. 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’s revenue on stronger demand for Café Mesra. However, we are concerned over the long-term prospects of its retail business on the back of EV adoption. Maintain MARKET PERFORM.

Risks to our call include: (i) volatility in its product prices, translating to volatility in margins, (ii) a slowdown in the domestic economy, resulting in lower demand for fuels, and (iii) a slowdown in the air travel segment, resulting in lower demand for jet fuel.

Source: Kenanga Research - 22 Jan 2024