Petronas Dagangan Bhd (PDB) recorded a very good quarter one 2023 earnings performance. Quarter-on-quarter and year-on-year quarter one 2023 core net profit of RM302 million was 93% higher, mainly due to the fact that PDB’s quarter four 2022 performance was weighed down by lumpy cost items, such as catch-up repair and maintenance costs, which is a common recurring theme in almost every final quarter for PDB.
The retail business also likely benefited from larger lagged inventory gains in quarter one 2023 compared to quarter four 2022, since the average Mean of Platts Singapore (MOPS) price for RON95 motor gasoline rose 5% quarter-on-quarter in quarter one 2023, said CGSCIMB in the recent Company Note.
Under the Automatic Pricing Mechanism, the government ensures that PDB is compensated for the unfavourable gap between the higher MOPS prices and the lower retail pump prices. Ultimately this means that PDB’s retail profits are correlated to spot MOPS prices, and rising MOPS prices almost always result in higher retail profits.
Retail profits rose quarter-on-quarter despite retail sales volume falling quarter-on-quarter against the Dec travel peak. Meanwhile, the commercial business saw higher quarter one 2023 earnings before interest and tax, quarter-on-quarter, probably because MOPS prices for jet fuel fell 10% quarter-on-quarter.
“We think that PDB’s jet fuel selling prices lag the direction of its costs, hence lower jet fuel MOPS prices may have resulted in a quarter-on-quarter lift to commercial profits in quarter one 2023, which was augmented by what we believe to be higher quarter-on-quarter commercial sales volumes on the back of recovering air travel,” said CGSCIMB.
Separately, the convenience store business also performed better quarter-on-quarter, possibly due to better footfall in the stores, but also possibly due to one-off expenses in quarter four 2022. On a year-on-year basis, PDB’s quarter one 2023 core net profit was 155% higher than quarter one 2022, due to the large losses suffered in quarter one 2022 from jet fuel sales. Jet fuel MOPS prices rose significantly during quarter one 2022 but PDB’s jet fuel selling prices had lagged.
Outlook for quarter two 2023 future good, but medium-term outlook clouded Average jet fuel MOPS prices are down a further 12% so far this quarter two 2023 future versus quarter one 2023, hence commercial profits may remain strong for at least another quarter and help support PDB’s performance in quarter two 2023 future.
Jet fuel sales volumes may also continue to rise sequentially in the run-up to the summer travel season. However, the medium-term outlook for the retail business may become more challenging if the government proceeds to cut fuel subsidies, as it has already hinted it may do for retail diesel sales. This is the key de-rating catalyst.
Retail volume growth may also taper off into the low single-digit percentages in future quarters, as current volumes may already be 10-15% above pre-Covid levels.
An uncertain earnings growth outlook may also hamper growth in dividends. Upside risks identified by CGSCIMB are the stronger-than-expected jet fuel demand recovery.
Potential de-rating catalyst is that the Malaysian government is working towards introducing a targeted subsidy scheme, which may reduce the total volume of retail fuel subsidies that could eventually impact the demand for motor gasoline and diesel.
Upside risks identified by CGSCIMB are the stronger-than-expected jet fuel demand recovery over the next year as China’s international borders reopened in early-Jan 2023.
