• Keep NEUTRAL and MYR20.15 TP, 1% upside. We saw a high level of compliance to Petronas’ healthy and safety policies in place, coupled with an increasing emphasis on sustainability efforts from our site visit to terminals at Kota Kinabalu. Despite sales volume recovery, Petronas Dagangan’s operating cash flow may remain volatile in the near term.

• Sabah’s site visit. Last week, PETD hosted an investor relations visit to its business operations in Kota Kinabalu, Sabah – Sepangar Bay Fuel & LPG Terminal (SBFLT) and Kota Kinabalu Aviation Fuel Terminal (KKAFL). Sabah contributed about 10-15% of total sales volume in the past. For the retail division, there are currently 76 petrol stations in Sabah, with a 2-3 new station expansion pa. For SBLFT, the bulk of the products are sourced from refineries in Malacca. Cost-to-serve for fuel and LPG (which includes logistic and storage costs) have lowered YoY to MYR0.1389/litre and MYR30.67/tonne, thanks to volume recovery following the re-opening of economies and borders. SBLFT is looking to obtain the supply from refineries in Pengerang once the plants achieve stable output and this could further reduce logistic costs. SBLFT is also one of the 14 selected terminals under Project Drive Optimisation Value (DOVE), embarked since 2020, whereby PETD will no longer own inventory at the terminal. The management and ownership of these inventories have been transferred to PETCO Trading Labuan Company Ltd (PTLCL). This will allow PETD to eliminate exposure of the unfavourable Means of Platts Singapore (MOPS) movement. Meanwhile, we saw a high level of compliance to Petronas’ healthy and safety policies being demonstrated, coupled with an increasing emphasis on sustainability efforts.

• Targeted fuel subsidy timeline uncertain. PETD is still in close discussion with the Government on the potential targeted subsidy, and the implementation timeline remains uncertain. At the same time, PETD is also negotiating with the Government to recoup the delayed fuel subsidy payment. Recall that its operating cash flow has declined by MYR551m in 2Q22 as the increase in trade receivables (+1.5x QoQ) was offset by the spike in trade payables (+1.1x QoQ). Hence, we may continue to see a rather volatile operating cash flow, mainly from the escalated fuel subsidy from the Government amidst higher product prices.

• We maintain our earnings estimates. DCF-derived TP is kept at MYR20.15 with the incorporation of a 2% ESG premium, based on its score of 3.1. We have assumed a lower dividend payout of 65% in FY22 (1H22 implied payout at 55%) before normalising to 80% in 2023F, vs the pre- pandemic average historical payout ratio of 78% (ex-special dividends).

Source: RHB Research - 3 Oct 2022