PETDAG anticipates continued strength in its commercial division in FY24, with aviation fuel demand projected to approach pre-COVID volumes. The company is also expanding its SETEL application to broaden service offerings beyond fuel payments. We maintain our forecasts, TP of RM23.70 and MARKET PERFORM call.

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

1. PETDAG anticipates its commercial division will maintain strong volume growth in FY24, buoyed by the resurgence in business activities. Furthermore, it projects aviation fuel demand to approach 98% of the FY19 levels, marking a return to pre-COVID highs in terms of volume. To note, the group achieved 80% of FY19 commercial volumes in FY23.

2. The company's SETEL application continues to attract user growth, especially for fuel payments. PETDAG plans to broaden the app's features to improve user experience. Although currently still unprofitable, the investment in SETEL is deemed justifiable due to the ongoing consumer digitization trend and the management is likely to continue spending on SETEL to gain more synergies with its existing petrol station network.

3. PETDAG also aims to leverage its existing aviation customers for the sale of sustainable aviation fuel (SAF) which is part of the group’s strategy to expand into environment-related businesses. At this juncture, the contribution of the venture will still be minimal as it is still at an experimental stage but in the longer run it might pay off in our view as demand for SAF from its existing aviation clients will increase in the longer run due to increased awareness for ESG.

Forecasts. Maintained.

Valuations. Correspondingly, we maintain our DCF-based TP (WACC: 10%; TG: 1%) at RM23.70. 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 deman (ii) the global economy slips into a recession and derails recovery international air travel, and (iii) reduced fuel consumption on accelerate adoption of EVs.

Source: Kenanga Research - 28 Feb 2024