PETDAG guided for stable volume growth across its divisions in FY24, with aviation fuel volumes anticipated to return to pre-COVID levels. It is well-prepared for the transition to a targeted fuel subsidy system and does not anticipate the initiative to have any significant impact on its sales volumes. We maintain our forecasts, TP of RM23.70 and OUTPERFORM call.

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

1. It is moderately optimistic on its outlook in FY24 with stable volume growth across its divisions, underpinned by modest GDP growth. Specifically, its aviation fuel business will be buoyed by the recovery of air traffic in Malaysia, which could reach 98% of pre-Covid levels in 2019.

2. PETDAG is not overly concerned about the impact of diesel subsidy rationalisation. It believes it will only prompt certain customers to source diesel from its commercial division, against its retail division previously (with a neutral impact on the total volume). It is well- prepared for the transition to a targeted fuel subsidy system with its fleet card system, which includes both physical fuel cards and a cardless system accessible through SETEL, a mobile app developed by PETDAG. Customers can sign up to these services via its SmartPay online portal.

3. PETDAG shared that in 1QFY24, there was an increase in gross profit for the retail division, while the commercial division experienced a 4% YoY drop in volume on weaker sales of miscellaneous products, although diesel and aviation fuel volumes remained stable. The company also highlighted that increased promotional activities contributed to higher overall operating expenses (opex) in 1QFY24. However, these expenses are expected to decrease in 2QFY24 and beyond in the absence of festive events.

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 strong 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. Maintain OUTPERFORM.

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

Source: Kenanga Research - 24 May 2024