• Keep NEUTRAL, with new MYR20.24 TP from MYR20.82, 9% upside. Petronas Dagangan’s 1H24 results bore no surprises, with core profit falling 11% YoY no thanks to higher opex despite overall sales volume growth of 6%. We believe the potential delay in the RON95 subsidy rationalisation would provide a breather while a clearer impact on the diesel subsidy rationalisation will be known in 2H24.

• Within expectations. At 51% of our and Street full-year estimates, PETD’s 1H24 core earnings of MYR516m (-11% YoY) came in within expectations. A second interim DPS of 20 sen was declared, summing up to 38 sen in 1H24 (2Q23: 18 sen).

• Results review. 2Q24 revenue improved by 5% QoQ on higher sales ASPs (+1%) and sales volume (+4%). As such, core earnings also increased by 26% QoQ to MYR288m, thanks to higher gross profit led by lower product costs across all segments masking higher opex. Cumulatively, despite revenue improving by 10% mainly driven by higher sales volume (+6%) and ASPs (+4%), 1H24 core earnings fell by 11%, dragged by higher operating expenditure from all segments and higher product costs for the retail division.

• Outlook. PETD’s retail sales volume grew by 12% YoY but commercial sales volume fell by 4% YoY in 2Q24. PETD guided that it experienced a reduction in retail diesel volume following the implementation of Subsidised Diesel Control System (SKDS) 2.0 in June, whilst commercial diesel volume registered an uplift, as a result of the higher retail diesel price. Such a trend could continue in 2H24. Meanwhile, Prime Minister Datuk Seri Anwar Ibrahim was reported as saying the rationalisation of the RON95 subsidy remains off the table for now, as the Government wants to ensure the public fully understand the implementation of targeted diesel subsidies. As such, we take the view that PETD’s 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.

• We maintain our earnings estimates but our DCF-derived TP drops to MYR20.24 from MYR20.82 after ascribing a higher WACC of 7.8% (from 7.6%) to factor in a more uncertain outlook upon the 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 - 21 Aug 2024