• Keep NEUTRAL, with new MYR20.82 TP from MYR22.58, 1% upside. Petronas Dagangan’s 1Q24 results bore no surprises, with core profit falling 24% YoY no thanks to higher opex despite overall sales volume growth of 7%. Operating cash flow improved substantially this quarter due to higher subsidy receipts. We do not discount the possibility of a knee-jerk reaction towards retail sales volume following the implementation of the targeted fuel subsidy.

• Within expectations. At 23% of our and Street full-year estimates, PETD’s 1Q24 core earnings of MYR228m (-24% YoY; +9% QoQ) are in line with expectations. A first interim DPS of 18 sen was declared (1Q23: 15 sen).

• Results review. 1Q24 revenue decreased by 7% QoQ on lower sales ASPs (-7%) amidst flattish sales volume. That said, core earnings increased by 9% QoQ to MYR228m, thanks to higher gross profit from motor gasoline or mogas and diesel backed by lower product costs as well as better contribution from the convenience segment. YoY wise, despite revenue improving by 9% mainly driven by higher sales volume, 1Q24 core earnings fell by 24%, dragged by higher operating expenditure from all segments and higher product costs for the commercial division.

• Outlook. PETD’s retail sales volume grew by 13% YoY but commercial sales volume fell by 3% YoY in 1Q24. Its retail sales volume is likely to remain resilient in 2024, backed by decent private sector consumption while the commercial business should still benefit from a continuous recovery in tourism activities. Meanwhile, following the announcement of the implementation of targeted subsidies for diesel (in 2024) and RON95 petrol (potentially in 2H24), the impact remains unclear but we do not discount the possibility of a knee-jerk reaction towards retail sales volume. Petrol Dealers Association of Malaysia (PDAM) has also highlighted that the potential subsidy removal could harm the commission for petrol retailers due to the potential spike in merchant discount rate (MDR) and evaporation costs that are linked to ASPs. PDAM is currently in discussion with the Government to ensure such concerns have been addressed upon the implementation of fuel subsidy.

• We maintain our earnings estimates but our DCF-derived TP drops to MYR20.82 after we roll forward our valuation base year to FY25F and ascribed a higher WACC of 7.60% (from 7.32%) to factor a more uncertain outlook upon fuel targeted subsidy implementation. Our TP also includes a 4% ESG discount, based on the company’s ESG score of 2.8 out of 4. Our TP implies 20x FY25F P/E, ie slightly below -1SD from 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), this counter offers decent FY24F-26F yields of 3.9-4.1%.

Source: RHB Research - 23 May 2024