HLIB Research said the lower contribution from PetDag’s retail segment could weigh the company’s bottom line in 2H24.
PETALING JAYA: Petronas Dagangan Bhd
’s (PetDag) earnings are likely to moderate in the second half of 2024 (2H24) on lower diesel sales.
This comes as the retailer and marketer of downstream petroleum products is expected to see the full impact of diesel-subsidy removal from the third quarter (3Q) of this year.
According to Hong Leong Investment Bank Research (HLIB Research), lower contribution from PetDag’s retail segment could weigh the company’s bottom line in 2H24.
“We expect contribution from the retail segment to record a sequential decline in 2H24 as the impact of floated diesel prices will be fully felt from 3Q24,” the research house said.
“Even if local sales volumes were to be sustained since the subsidy rationalisation took effect on June 10, reduced diesel smuggling would likely hit demand for the fuel,” the research house added.
HLIB Research maintained its “hold” call on PetDag, with an unchanged target price of RM19.13.
Citing government data, the research house noted that diesel retail sales fell 30% in the week after the subsidy cut, although half of the amount had been redirected to commercial channels.
“Our back-of-the-envelope calculation suggests that PetDag would lose over 500 million litres of diesel sales a year, equivalent to 3% of total sales volume in 2023,” HLIB Research said.
“We have not imputed the impact of subsidy cuts for RON95 petrol into our forecasts as the implementation timeline and magnitude of the price hikes are fluid at this juncture,” the research house added.
Meanwhile, CGS International Research (CGSI Research) and TA Research maintained their “sell” calls on PetDag, with unchanged target prices of RM16.78 and RM18.10, respectively.
CGSI Research said the key downside risk for PetDag is the subsidy cut for RON95 fuel, which has a bigger impact on the group’s net profit compared to diesel.
The research house estimated that PetDag saw an 8% week-on-week fall in total diesel sales, or a 2% drop in overall volume, in the week June 10-17 after the removal of the diesel subsidy.
“We estimate that on a full-year basis, PetDag may see a 5% decline in profit after tax and minority interest (Patami), assuming that the developments in the week of June 10-17 are representative of the full year,” CGSI Research said.
“In our view, this is a marginal decline in Patami as diesel subsidies for Sabah and Sarawak remain intact, and because certain commercial vehicles are exempted from the subsidy cuts while lower-income individuals secured cash assistance handouts,” it added.
Similarly, TA Research said the prospective subsidy rationalisation for RON95 petrol could adversely impact PetDag’s retail-segment earnings, given demand destruction and comparatively higher sales volume derived from petrol compared to diesel.
“Our valuation is at a discount to its five-year mean forward price-earnings ratio of 31 times, given an increasingly challenging earnings outlook from subsidy rationalisation plans undertaken by the government,” the research house said.
PetDag posted a net profit of RM502.4mil in 1H24, down from RM577.5mil in 1H23, despite higher revenue of RM19.23bil, compared with RM17.56bil a year ago.
Going against the grain, MIDF Research reiterated its “buy” call on PetDag, attributing the rating to the company’s consistent dividend payouts in line with stable pre-tax profit margins amid a volatile oil market.
In addition, it said, PetDag is a renowned retail brand for refined-petroleum products, as well as petrol stations, which gives it long-term leverage over other local and regional refineries and fuel stations.
“PetDag’s 2024 performance is anticipated to remain positive, notably in the retail and commercial segments, supported by an economic environment with gross domestic product growth at 5% (in-house estimate),” MIDF Research said.
It added that the elevated and stable price of Brent crude could further improve PetDag’s sales volumes amid better average selling prices and higher local and regional demand for refined petroleum.
Nevertheless, it remained cautious about the potential impact of domestic regulatory changes, global macroeconomics and geopolitical developments on PetDag’s product costs and operating expenditure in the near term.
“All in all, we remain positive about PetDag’s 2024 performance following anticipatedly higher travel frequency and aviation sector recovery in 2024, consequently adding to higher demand for diesel, mogas and jet fuel,” MIDF Research said.
