Kenanga Research is largely neutral on Petronas Dagangan Bhd’s (PetDag) near-term prospects but is concerned over the long-term prospects of the group’s retail business on the back of electric vehicle (EV) adoption.
In its Company Update today (Jan 22), the research house said the leading retailer and marketer of downstream petroleum products is all set for the implementation of diesel subsidy rationalisation.
“It does not expect the rationalisation to hit its diesel sales volumes given diesel being an essential fuel item. This is also evident from historical data during the floatation of petrol and diesel prices in 2019, which showed no material impact on its retail sales volumes,” it said post-meeting with the group’s management.
In 2023, PetDag added 60 Café Mesra outlets, including kiosks, in Peninsular Malaysia, bringing the total to 100.
Kenanga said the group will grow the franchise at a more measured pace amidst a soft market condition in the future.
“An interest point to note is the stand-alone ones, which is not attached to petrol stations, but located in shopping malls, office buildings, LRT/ MRT stations and terminals) are doing even better given higher foot traffic.
“Nonetheless, Café Mesra’s contribution to its convenience division revenue remains insignificant at present,” it added.
The research house maintained its MARKET PERFORM call and its forecasts.
“Correspondingly, we maintain our DCF-based TP (WACC: 10%; TG: 1%) at RM22.40. There is no change to our valuation based on
ESG given a 3-star ESG rating as appraised by us.”
Aside from that, the company does not expect a substantial earnings contribution from EV charging in FY24, given the early stage of the EV market.
“Conversion of Alternating Current (AC) chargers to Direct Current (DC) chargers is underway to decrease the average charging time for EV users.
“With 20 available AC charger stations, PetDag’s partner Gentari, will increase capacity in the coming years. The group will earn
income through fees paid by Gentari or profit-sharing arrangements, with no direct operation of the charging stations,” it said.
It added: “We like PetDag due to its highly cash generative business that translates to high capacity to pay dividends, its strong
balance sheet with a sizeable war chest of RM2.8 billion, and growing convenience division’s revenue on stronger demand for Café Mesra.”
The risks to Kenanga’s call include volatility in its product prices, translating to volatility in margins, a slowdown in the domestic economy resulting in lower demand for fuel, and a slowdown in the air travel segment, resulting in lower demand for jet fuel.
