KEY INVESTMENT HIGHLIGHTS

• PetDag’s 4QFY20 sales volume expected to be impacted by the enforcement of CMCO in October
• While ASPs is expected to remain stable but 4QFY20’s earnings will be dragged by lower retail sales volume
• Encouraging growth in usage of SETEL application and diversification of revenue to bode well for PetDag
• FY20-21F earnings revised down by -28.93% and -5.2% respectively
• Maintain NEUTRAL with a revised TP of RM18.29 per share

Sales volume in 4QFY20 to be impacted by CMCO. We attended a virtual analyst briefing organised by Petronas Dagangan Berhad’s (PetDag) yesterday and came away with a clearer picture on the company’s operational outlook. From the briefing held, we gather that PetDag’s volume will once again be impacted by the implementation of the nationwide conditional movement control order (CMCO) back in October. That said, we anticipate the CMCO will have less severe impact vs. during the first movement control order (MCO) implemented back in March as average selling prices (ASPs) have stabilised this time around. Therefore, we are expecting overall FY20 retail sales volume to decline by another -4.0% due to this recent development.

Recall that, 3QFY20 overall sales volume and ASPs declined by - 22.0%yoy and -21.0%yoy respectively due to lower sales volume and ASPs vs. the same period last year. However, the year-over-year decline had narrowed from the preceding quarter due to the implementation of recovery movement control order (RMCO) which lifted local travel movement restrictions. This was a stark difference from the -39.0%yoy decline in sales volume experienced in 2QFY20 due to implementation of MCO from March through 9 th June 2020.

Stable average selling prices to help cushion earnings. While we anticipate a decline in sales volume in 4QFY20, we believe that PetDag’s earnings will be cushioned by better ASPs during the quarter. This is as MOPS prices have been on a stable movement trend despite a slight dip in early November due to the spike in worldwide Covid-19 cases. That said, the increase in oil price in the recent weeks following positive news on Covid-19 vaccine developments is expected to result in a stabilised ASPs for fuels across the board for the remainder of the quarter. Refer to Figure 1 below.

While we opine that the crude oil price will not trade higher than USD45pb for the remainder of the year; we are positive on the stability of the crude oil price shown in the recent weeks which allows for better visibility in terms of purchasing and inventory management for the fuel retailers.

Encouraging SETEL usage and diversification of portfolio to reduce downside risk. We gather from the Management that the number of new SETEL user registration as well as; active users has increased to 1.6m users in 3QFY20 vs 1.3m users in 2QFY20 respectively. Furthermore, the volume and margin growth from SETEL transactions have increased to >100% and >80% in 3QFY20 respectively vs 2QFY20. This was due to customers continuing to opt for a reduced human contact at petrol stations. We understand that PetDag has also extended its MESRA stores offering to include Makan@MESRA and Deliver2Me to enhance customer experience and encourage physical distancing which we opine will continue to bode well for its non-fuel revenue.

Additionally, PetDag’s recent solution in providing LNG to off-grid customers in Peninsular Malaysia that are not being served by the natural gas infrastructure is also expected to reduce its dependence on its retail fuel revenue. While we are unable to quantify the financial impact from this new service at this juncture; we view this positively as it could assist in reducing the downside risk on its earnings, especially during the CMCO period.

Impact on earnings. After taking into consideration all the factors that could impact PetDag’s earnings going forward, we are reducing our FY20F earnings by –28.3% to RM306.4m (from RM427.3m previously). This is as we revise down our: (i) FY20 retail sales volume assumption by a further -4.0% to incorporate the potential decline in volume following the implementation of CMCO in 4QFY20 and; (ii) our average MOPS price assumption given that crude oil price continues to be swayed by the Covid-19 development.

In addition, we have also revised our FY21F earnings estimate by -5.2% to incorporate lower sales volume assumption for the commercial segment given that we do not foresee air travel to return to normal at least for the first half of FY21.

Target Price revised to RM18.29. Following our earnings revision, we have also revised our target price to RM18.29 (from RM19.31 previously). Our valuation is premised on forward PER21 of 25x pegged to EPS21 of 73.2sen. The target PER is based on PetDag’ rolling four-quarter average PER over five years.

Maintain NEUTRAL. All in, we are maintaining our NEUTRAL recommendation on PetDag at this juncture. We opine that the recommendation is reflective of the current and near-term operating environment for fuel retailers with gradual recovery in demand is expected to take place in FY21F. While we do anticipate recovery of both sales volume and ASPs in FY21F; we remain wary of the potential adverse impact from the ongoing Covid-19 developments which might stall earnings recovery. This includes the potential extension of the current CMCO into the 1Q of CY21 and also the continued air travel bans to reduce the spread of Covid-19.

That said, we continue to view PetDag positively given its ongoing effort in mitigating the impact from lower selling prices and sales volume via: (i) increasing pump productivity; (ii) diversifying its revenue portfolio and; (iii) creating brand stickiness via SETEL mobile application. Additionally, its dividend yield remains decent at 3.0% FY21F.

Source: MIDF Research - 19 Nov 2020