We left Petronas Dagangan Berhad’s (PETDAG) virtual analyst briefing with the following key takeaways: (i) Expect jet fuel volume to continue growing from the recovery of air travel; (ii) PETDAG continues to bear the risk of volatile jet fuel prices; (iii) Targeted subsidy to impact the group’s bottom-line. No change to our earnings forecasts. Maintain Sell with an unchanged TP of RM21.90/share based on 24x CY24 EPS.

Jet Fuel Sales Volume to Grow From Recovery of Air Travel

Malaysia’s air passenger traffic continues to recover but has yet to return to pre-pandemic levels. 3QCY23 domestic and international passenger traffic in Malaysia are still 15.2% and 23.2% lower respectively compared with 3QCY19 levels (Figure 2). We believe there is still much more room for jet fuel sales volume to grow as the demand for air travel gradually recovers, supporting growth in the Commercial segment.

Continue to Bear the Risk of Volatile Jet Fuel Prices

Based on current commercial terms with airlines, jet fuel selling prices of PETDAG typically lag the market price. Therefore, jet fuel prices in an uptrend would be unfavourable to PETDAG as the selling price is lower than their cost. Due to the cyclical nature of jet fuel prices, customers prefer the current pricing structure to have more certainty in the price. Consequently, PETDAG will continue to bear the risk of fluctuation in jet fuel prices. As jet fuel prices have trended downwards since September 2023, this favourable price movement is expected to improve the operating margins of the Commercial segment in 4QFY23 compared with 3QFY23 (Figure 3).

Targeted Subsidy to Impact Bottom-line

In Budget 2024, the government announced the rationalisation of fuel subsidies, starting with diesel. The group disclosed that they have the systems in place to ensure a smooth transition, regardless of the methodology of targeted subsidy. To minimise the impact on consumers, we expect diesel and RON95 to be gradually floated to the market price commencing mid-2024 after the Central Database Hub (Padu) is ready.

According to management, when RON97 was floated, there was increased downtrading towards the subsidised RON95. As 50% of the total volume of fuels sold by PETDAG is subsidised fuels (majority RON95), we expect a drop in demand once the prices are gradually floated. Based on the Automatic Pricing Mechanism, the petrol dealers’ margin is fixed at 15sen/litre for petrol and 10sen/litre for diesel. Hence, the profitability of PETDAG will inevitably be adversely impacted by the drop in demand from FY24 onwards.

Impact

No Change to Our Earnings Forecasts

Valuation

Maintain Sell with an unchanged TP of RM21.90/share based on 24x CY24 EPS.

Source: TA Research - 27 Nov 2023