• Keep NEUTRAL, new MYR23.07 TP from MYR22.22, 3% upside with c.3% FY23F yield. Petronas Dagangan’s 1Q23 results surpassed expectations on better-than-expected margins from its retail arm. We lift our earnings forecasts, but remain conservative in our outlook on its margin sustainability – given the volatility in product prices.

• Above expectations. At 35% and 37% of our and Street full-year estimates, PETD’s 1Q23 core earnings of MYR299m (+1.4x YoY, +65% QoQ) surpassed expectations due to better-than-expected contributions from the retail arm. A first interim DPS of 15 sen was declared (1Q22: 5 sen).

• Results review. 1Q23 revenue dropped by 9% QoQ on lower ASPs (-7%) and sales volumes (-2%). Despite so, core earnings surged by 65% QoQ thanks to stronger numbers from its retail (+83%, on better margins led by lower product costs and favourable prices) and commercial divisions (+23%, on lower opex). YoY, 1Q23 core earnings also increased by 1.4x, on the back of both retail and commercial divisions, anchored by a turnaround of its commercial arm following the stabilisation of Jet A1 and Diesel prices and a stronger retail segment (+7.2%, on better margins and higher sales volume).

• Outlook. Retail and commercial sales volumes grew 15% YoY and 10% YoY in 1Q23. Overall, PETD’s sales volume is likely to remain solid and resilient in 2023 on the back of a recovery in tourism. However, we are uncertain if the strong operating margins delivered in 1Q23 are sustainable – given the volatility in product prices. Meanwhile, we note that its operating cash flow in 1Q23 normalised to MYR400m, on top of a decline in trade receivables (-9% QoQ) and payables (-3% QoQ).

• We increase FY23-25F earnings by 8-9% after imputing better margins. Post earnings estimates upgrade and rolling forward our valuation base year, our DCF-derived TP rises to MYR23.07 – this includes a 4% ESG discount, based on PETD’s revised ESG score of 2.8 from 3.1. Our TP also implies 23x FY24F P/E, ie slightly below its 5-year mean of 25x. At an 80% dividend payout ratio vs the pre-pandemic average historical payout ratio of 78% (ex-special dividends), the group offers decent FY23-25F yields of 3.3- 3.8%.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 23 May 2023