PETDAG has been actively engaging in strategic partnerships to develop sustainable aviation fuel (SAF) leveraging Neste’s expertise. It has launched pilot projects to build up SAF supply chain and is working closely with regulators to create a favorable regulatory environment for the economic development of SAF. We maintain our forecasts, TP of RM23.70 and OUTPERFORM call.

We came away from PETDAG’s analyst briefing feeling reassured of its near-term prospects. The key takeaways are as follows:

1. PETDAG has been actively engaging in strategic partnerships to spearhead the development and adoption of (SAF) in Malaysia. By collaborating with Malaysia Aviation Group (MAG) and Neste, PETDAG aims to establish a robust SAF supply chain. These partnerships are pivotal as they combine PETDAG’s extensive distribution network with MAG’s operational needs and Neste’s expertise in SAF production. This triad ensures that the produced SAF meets international standards and can be efficiently distributed across the aviation sector in Malaysia.
    
2. To facilitate the adoption of SAF, PETDAG has been focusing on enhancing the necessary infrastructure. This includes upgrading existing fuel storage and distribution facilities to handle SAF. Additionally, PETDAG has launched pilot projects to test and refine the blending, storage, and distribution processes for SAF. These projects are critical for identifying and addressing any technical challenges, ensuring that the transition to SAF is seamless. By investing in infrastructure, PETDAG is laying the groundwork for a sustainable aviation future, reducing carbon emissions, and supporting Malaysia’s environmental goals.
    
3. Recognising the importance of regulatory support for the widespread adoption of SAF, PETDAG is actively engaging with government bodies and regulatory agencies. PETDAG is involved in advocating for supportive policies, including tax incentives and blending mandates that encourage the use of SAF. By working closely with the government, PETDAG aims to create a favourable regulatory environment that accelerates the deployment of SAF in the aviation sector. This proactive approach not only supports PETDAG’s sustainability goals but also positions Malaysia as a leader in the transition to greener aviation fuels.
    
4. Forecasts. Maintained.

Valuations. We maintain our DCF-based TP (WACC: 10%; TG: 1%) at RM23.70. There is no change to our valuation based on ESG given a 3- star ESG rating as appraised by us (see Page 4).

Investment case. We like PETDAG due to: (i) its strong cash-generative business that translates to high capacity to pay dividends, (ii) its strong balance sheet with a sizeable war chest, and (iii) growing convenience division revenue on stronger patronage for Café Mesra. Maintain OUTPERFORM.

Risks to our call include: (i) a structural decline in demand for fuel (such as a switch to public transport and the adoption of electrical vehicles) post the fuel subsidy rationalisation, (ii) the global economy slipping into a recession, derailing the recovery in the global air travel industry, and (iii) inability to rein in rising operating cost.

Source: Kenanga Research - 12 Aug 2024