PETDAG’s FY23 results met expectations. Its FY23 core net profit jumped 30% driven by improved jet fuel spreads. The introduction of fuel subsidiary rationalisation may dent its retail volume but past experience points to the impact being temporary. We raise our FY24F net profit forecast by 6%, lift our TP by 6% to RM23.70 (from RM24.90) but maintain our MARKET PERFORM call.

Its FY23 core profit of RM979.9m (excluding RM23.1m impairment loss on receivables, RM17.2m impairment on property, plant & equipment, RM8.9m impairment write-back and RM5.0m net forex loss) met expectations. It declared a DPS of RM0.27, largely within expectations.

YoY, its FY23 top line grew 2% thanks to higher sales volumes at its retail sector, partially offset by a weaker showing from its commercial division due to lower selling prices. However, its core profit jumped 30% thanks to improved jet fuel spreads at its commercial division.

QoQ, its top line rose 2% due to higher retail revenue during the yearend driving season, partially offset by a slightly weaker showing from the commercial division. Similarly, its core profit dropped marginally by 1% as improved profits from the retail and commercial divisions were negated by losses at the convenience division and from associates and joint ventures.

Outlook. We expect stable outlook for PETDAG’s retail volume in FY24. There is a risk that the introduction of fuel subsidy rationalisation may dent its retail volume but past experience points to the impact being temporary. Meanwhile, its commercial division is poised for growth driven by an increase in business activities.

Forecasts. We raise FY24 earnings by 6% after imputing slightly higher commercial volume growth assumption to 3% from 2%.

Valuations. Correspondingly, we raise our DCF-based TP (WACC: 10%; TG: 1%) by 6% to RM23.70 (from 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).

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 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) reduced fuel consumption on accelerated adoption of EVs.

Source: Kenanga Research - 27 Feb 2024