Commercial profits to boost PetDag performance

PetDag's medium-term outlook could be clouded by potential fuel subsidy cuts, said CGS-CIMB Research. — Reuters

PETALING JAYA: Petronas Dagangan Bhd (PetDag), which reported a two-fold profit jump in the first quarter ended March 31 (1Q23), is expected to see another good quarter.

But its medium-term outlook could be clouded by potential fuel subsidy cuts, according to CGS-CIMB Research.

The research firm said that average Mean of Platts Singapore (MOPS) jet fuel prices are down a further 12% so far in the second quarter of this year versus in the first quarter and “hence commercial profits may remain strong for at least another quarter and help support PetDag’s performance in 2Q23.”

MOPS is a pricing basis for many refined products in South-East Asia.

CGS-CIMB noted that PetDag’s 1Q23 net profit of RM302mil came in higher quarter-to-quarter (q-o-q) and year-on-year basis.

The earnings performance was 93% higher q-o-q, mainly due to the fact that PetDag’s 4Q22 performance was weighed down by lumpy cost items, such as catch-up repair and maintenance costs. However, this was a common recurring theme in almost every final quarter for PetDag, it added.

“Jet fuel sales volumes may 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,” CGS-CIMB Research said.

According to the research firm, retail volume growth may also taper off into the low single-digit percentages in future quarters, as current volumes may already be 10% to 15% above pre-Covid levels.

Meanwhile, MIDF Research said PetDag is expected to remain cautiously optimistic and will continue to strengthen its core and business growth.

“Leveraging on the economic recovery, upcoming festive seasons and revival of the tourism industry, we opine that PetDag’s performance will return to pre-pandemic levels for its retail and commercial segments.

“Additionally, PetDag will further support its sustainability agenda with plans to install additional electric vehicle chargers as well as solar panels in its stations by the end-year,” MIDF Research said in its report.

It said the increase in earnings for the commercial and convenience segment in 1Q23 was due to increase in travelling frequency within Malaysia and internationally, as well as the increase in transportation and logistics demand from other industries. While MIDF Research makes no changes to its earnings estimates, it remains positive of PetDag’s prospects in its retail and convenience store businesses premised on increasing demands for retail fuel from travelling activities and upcoming festive seasons. “Nevertheless, we continue to be vigilant on increasing inflationary pressures and the unexpectedly volatile oil market. Hence, we are taking a more conservative approach of maintaining our earnings estimates at this juncture,” it added.

MIDF Research maintains a “buy” call on the stock with a RM24.52 target price, which is by pegged to a price-earnings ratio of 28.5 times.

On the other hand, CGS-CIMB Research reiterates its “reduce” rating premised on the uncertain earnings growth outlook if fuel subsidy is potentially reduced, which may also hamper growth in dividends.