KEY INVESTMENT HIGHLIGHTS

• Targeted petrol subsidy to benefit 2.86m Malaysian citizens

• Subsidy of RM30 per month (for car users) and RM12 per month (for motorcycle users) in cash every four months

• RON95 will be floated in Peninsular Malaysia for non-BSH recipients; however, status-quo in Sabah and Sarawak

• Minimal impact on PetDag as earnings to be cushioned by extensive network of stations and growing pump productivity

• Maintain BUY with an unchanged TP of RM28.35 per share

Targeted petrol subsidy announced. The Malaysian government via the Ministry of Domestic Trade and Consumer Affairs has finally announced the details of the long-awaited targeted petrol subsidy scheme. The scheme which is expected to take effect in January 2020 will be eligible to the current recipients of Bantuan Sara Hidup (BSH) who are registered with the government and cross checked with Jabatan Pengangkutan Jalan’s (JPJ) database. The scheme is expected to benefit 2.86m Malaysian citizens whilst 11.6m cars and 6.8m motorcycles will be eligible for the scheme.

Subsidy details. The targeted petrol subsidy scheme is expected to benefit the BSH recipients in Malaysia with their own vehicle ownership and valid road tax. The vehicle ownership is limited to a maximum two (2) cars and two (2) motorcycles per recipients. The subsidy will be in the form of cash which will be directly wired to the identified recipients’ bank accounts. Additionally, it has been decided that the RON95 will be floated according to the market price for those not eligible for the subsidy residing in the Peninsular Malaysia.

Status-quo in Sabah and Sarawak. Even though the RON95 will be floated in Peninsular Malaysia, there will be no changes to RON95 being sold in Sabah and Sarawak. It will remain capped at RM2.08. We opine that this is most likely due to the high concentration of the recipients of BSH in those two states.

Impact on earnings. We are making no changes to our FY19/20F earnings estimates at this juncture as we opine that there will be minimal impact from the introduction of the targeted petrol subsidy to the earnings of Petronas Dagangan.

Maintain BUY with an unchanged TP of RM28.35. While we note that the decision to float RON95 in Peninsular Malaysia will have an impact on the sales volume of PetDag due to consumers potentially switching from driving to taking public transportations; however, we opine that the impact will be negated by the extensive network of 1,100 stations that PetDag has nationwide. Furthermore, it is noted that the newly refurbished stations have shown an average of +3.0 - 4.0% increase in sales volume from the recent refurbishment exercises which we opine will also help to mitigate the impact from the re-floating of the RON95.

According to the Management, PetDag’s app SETEL has also been gaining traction amongst its customers resulting in unprecedented redemption of points for various purchases within the PetDag’s system, be it petrol or goods from the Mesra store. Additionally, with the re-floating of the RON95, the receivables for PetDag is expected to improve as its receivables will be almost immediate given that the spot prices and selling prices are now equal to one another which will assist in mitigating the discrepancies in purchase price to the actual sales price.

No impact seen from cap in RON95 prices in Sabah & Sarawak as it is business as usual for the company. Hence, we are maintaining our BUY recommendation on PetDag with an unchanged TP of RM28.35. We continue to like PetDag due to: (i) extensive network of stations nationwide; (ii) robust balance sheet; (iii) clear growth strategies; and (iv) decent dividend yield of 3.6% FY20F.

Source: MIDF Research - 8 Oct 2019