Petronas Dagangan Bhd
(Oct 8, RM23.18)
Maintain hold with an unchanged target price (TP) of RM23.95: The Malaysian government has announced it would float RON95 pump prices, while targeted subsidies would be given to Bantuan Sara Hidup (BSH) recipients in Peninsular Malaysia. The structure remains unchanged in Sabah and Sarawak with the RON95 price fixed at RM2.08, as subsidies are smaller and with more diesel vehicles on roads there.

Petronas Dagangan Bhd’s (PetDag) retail sales volume mix is 80:20 in Peninsular Malaysia and Sabah and Sarawak. This announcement is earnings neutral, but likely have a positive effect on cash flow. The targeted subsidies may spur some spending towards PetDag due to the better loyalty points programme offered.

Effective January 2020, targeted fuel subsidies will be provided to owners of cars and motorcycles below 1,600CC and 150CC unless aged over 10 years and seven years respectively, based in Peninsular Malaysia under the BSH. Each recipient will receive RM120 for car and RM48 for motorcycle in every four months, limited to a vehicle per recipient.

The structure in Sabah and Sarawak is unchanged, with the RON95 price fixed at RM2.08 as the government’s subsidy there is relatively lower due to a different Automatic Pricing Mechanism and with more diesel vehicles on roads compared with petrol vehicles. The targeted subsidy scheme is expected to benefit 2.8 million citizens in Peninsular Malaysia, translating into 8.6% of the total population.

The subsidy removal will not have any positive earnings impact, but will result in a better cash flow for PetDag from shorter receivable days. PetDag will be able to enjoy the benefit of a full payment directly from consumers under the managed float system, compared to the current system whereby subsidy receivables by the government are paid with a two-month lag.

We believe consumer spending may shift towards PetDag, currently offering the highest fuel rebates through its loyalty card programme. As fuel becomes more expensive, consumers are likely to seek more attractive rebates to lower their costs of living. Nevertheless, we believe any incremental volume growth from grabbing market share would likely be small.

PetDag paid out a special dividend of 22 sen for financial year 2014 (FY14) after the removal of subsidy and implementation of the managed float system. However, we believe PetDag is unlikely to pay out a special dividend this time around as free cash flow is projected to be weaker due to a higher capital expenditure (capex) needed to expand its non-fuel business for future growth. While there are no concrete plans thus far, PetDag has hinted at a potential food and beverage business acquisition to build its non-fuel income.

We maintained our “hold” rating and discounted cash flow-based 12-month TP of RM23.95 given the news has no material impact on PetDag, while its retail outlook remains muted. Our current capex assumption of RM300 million to RM450 million for FY19 to FY21 had yet to factor in any acquisition needs to expand its non-fuel business; if it materialises, it would result in a lower cash position. At the current price, the stock offers a dividend yield of about 3% based on an average three-year payout ratio of 80%. — Affin Hwang Capital, Oct 8