• Keep NEUTRAL, new MYR23.17 TP from MYR23.07, 7% upside with c.4% FY24F yield. Petronas Dagangan’s 1H23 results beat expectations on better-than-expected margins from its commercial arm. We lift our earnings forecasts, but remain conservative in our outlook on its margin sustainability – given the volatility in product prices. Its operating cash flow in 2Q23 normalised to MYR383m (-4% QoQ), with a marginal decline in trade receivables (-2%) and payables (-2%).

• Above expectations. At 63% and 62% of our and Street full-year estimates, 1H23 core earnings of MYR576m (+99% YoY) surpassed expectations due to better-than-expected contributions from the commercial arm. A second interim DPS of 18 sen was declared (2Q22: 11 sen).

• Results review. 2Q23 revenue increased by 3% QoQ on higher sales volumes (+6%), which masked lower ASPs (-3%). That said, core earnings weakened by 16% QoQ to MYR278m, no thanks to higher opex arising from higher repair & maintenance as well as advertising & promotion expenses. For 1H23, core earnings doubled up to MYR576m, anchored by a turnaround of its commercial arm following the stabilisation of Jet A1 and diesel prices.

• Outlook. Retail and commercial sales volumes grew 2% YoY and 210% YoY in 2Q23. Overall, PETD’s sales volume is likely to remain resilient in 2023, premised on the back of an expected recovery in tourism activities. However, we are uncertain if the strong operating margins delivered in 1H23 are sustainable – given the volatility in product prices. Its convenience division also underwent a decent recovery, recording a PBT of MYR32m (+110% YoY) in 1H23 on the back of higher demand from Mesra Retail & Café. Meanwhile, we note that operating cash flow in 2Q23 normalised to MYR383m (-4% QoQ), with a marginal decline in trade receivables (-2% QoQ) and payables (-2% QoQ).

• We increase FY23-25F earnings by 3-8% after imputing better margins. Post earnings estimates upgrade, our DCF-derived TP rises slightly to MYR23.17 with the incorporation of a 4% ESG discount, based on PETD’s ESG score of 2.8 out of 4. Our TP also implies 23x FY23F P/E, ie slightly below its 5-year mean of 25x. At a 80% dividend payout ratio, vs the pre pandemic average historical payout ratio of 78% (ex-special dividends), the group offers decent FY23-25F y

Source: RHB Securities Research - 29 Aug 2023