Kenanga Research & Investment

Petronas Dagangan - Value Emerges

kiasutrader
Publish date: Thu, 23 May 2024, 10:49 AM

PETDAG's 1QFY24 results met expectations. Its 1QFY24 core net profit declined 23% YoY on lower product spreads and higher operating expenses. We expect healthy volume growth going forward. We maintain our forecasts and TP of RM23.70 but upgrade our call to OUTPERFORM from MARKET PERFORM as value has emerged after the recent weakness in its share price.

Its 1QFY24 core profit of RM228.1m (after excluding EI of RM1.6m impairment loss on trade receivables, RM1.5m unrealised forex gain and RM1m write-back of impairments) met expectations at 22% and 23% of our full-year forecast and the full-year consensus estimate, respectively. It declared an interim DPS of 18 sen, on track to meet our full-year forecast of 79.8sen.

YoY, its 1QFY24 revenue increased by 9% driven by strong sales volume in the retail division (+13%) and improvement at the convenience store division (buoyed by increased patronage for Kedai Mesra and Café Mesra). However, its core profit decreased by 23% due to lower product spreads in the commercial division and higher operating expenses across the group.

QoQ, its topline declined by 7% mainly on a seasonally weak period for the commercial division while its retail revenue was flat. However, its core profit increased by 15% on more favourable product spreads in the retail division and lower finance cost, partially offset by weaker product spreads in the commercial division.

Outlook. We expect healthy volume growth at both its retail and commercial divisions in FY24-25, supported by sustained domestic demand. We are not overly concerned about the impending diesel and petrol subsidy rationalisation, judging from the temporary drop in volumes following the floatation of fuel prices in 2018.

Forecasts. Maintained.

Valuations. 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 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, and (iii) growing convenience division revenue on stronger patronage for Café Mesra. Upgrade to OUTPERFORM from MARKET PERFORM as value has emerged after recent weakness in its share prices.

Risks to our call include: (i) a structural decline in demand for fuel (such as a switch to public transport and the adoption of electrical vehicles) post the fuel subsidy rationalisation, (ii) the global economy slipping into a recession, derailing the recovery in the global air travel industry, and (iii) inability to rein in rising operating cost.

Source: Kenanga Research - 23 May 2024

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