Below are key takeaways from Petronas Dagangan’s (PETDAG) virtual analyst briefing: (i) Demand risk from fuel subsidy rationalisation; (ii) The group is actively participating in sustainability via various initiatives. We lower our cost assumptions and raise our FY23/FY24/FY25 earnings forecasts by 23.0%/21.6%/26.7% respectively following the stellar 2QFY23 result. Reiterate Buy with a lower TP of RM24.50/share based on 24x CY24 EPS.

Demand Risk from Fuel Subsidy Rationalisation

According to management, hybrid and electric vehicles (EV) constitute of less than 2% of total new vehicle sales. The group estimates that there are around 10k EVs on the road, very small amount compared with c.60mn internal combustion engine (ICE) motor vehicles. Furthermore, new vehicle sales are showing steady growth momentum in 2023 and could potentially surpass then record car sales set in 2022. This should continuously drive demand for Mogas in the coming years ahead. Meanwhile, Malaysia’s air passenger traffic continues to recover but has yet to return to pre-pandemic levels. We believe there are still much more room for growth of jet fuel sales volume as demand for air travel gradually recovers to 2019 levels. Nonetheless, despite optimism from the management, we believe that the government’s move towards fuel subsidy rationalisation will lead to significant reduction in demand for the Retail segment.

Actively Participating in Sustainability via Various Initiatives

PETDAG is actively participating in sustainability via various initiatives, including: (i) collaborating with other parties including Gentari in rolling out EV charging facilities at its petrol kiosks; (ii) working closely to propagate the development of bio-refinery to produce bio-based products, which includes the sustainable aviation fuel (SAF); and (iii) collaborating with Malaysia Palm Oil Board (MPOB) and some OEM manufacturers to increase biodiesel component of its fleets to up to 100%. We view the group’s active involvement in these initiatives positively as the group transitions into a more sustainable future.

Impact

We lower our cost assumptions and raise FY23/FY24/FY25 earnings forecasts by 23.0%/21.6%/26.7% respectively following the stellar 2QFY23 result.

Valuation

We roll forward our base year but lower our PE valuation for PETDAG to 24x (previous 33x), which is 15% discount to the group’s 7-year historical mean PE. This takes into account the potential subsidy rationalisation plan in the future, which risks reducing demand in the Retail segment. Reiterate Buy with a lower TP of RM24.50/share (previous: RM26.70) based on 24x CY24 EPS.

Source: TA Research - 30 Aug 2023