Petronas Dagangan Bhd
(Sept 10, RM20.48)
Initiating coverage with market perform call and target price of RM19.64: PetDag is the leading marketer of downstream petroleum products, with a market share around 42%. It operates the largest retail station network in Malaysia with more than 1,000 Petronas petrol stations. PetDag is the market leader in the commercial gas (market share: around 68%) and liquefied petroleum gas (LPG) (around 57% market share) segments in Malaysia. It comes in second in both the retail (around 3%) and lubricants  (around 13%) segments.

In 2012, PetDag ventured overseas and it now has a presence in Thailand (lubricants), Vietnam (LPG) and the Philippines (lubricant and LPG).

PetDag’s share price has retreated 36% so far from the peak of RM31.82 on Dec 31, 2013, no thanks to the two Malaysia Airlines air disasters within the last six months. Even then, PetDag is still trading at 24 times price-earnings ratio currently, which is at a 55% premium to the KLCI as opposed to the 150% premium from the peak. It has been trading at a premium since February 2011 when the company started its high dividend payout of 89% to 95% for three years from, below 60% earlier. The question now is how much premium investors are willing to pay for the stock.

Historical data shows that PetDag has been trading at a 79% premium since February 2011, and at 89%, 69% and 50% premiums for the three-year, four-year and five-year means.

While PetDag is expecting a weak financial year 2014 ending Dec 31 (FY14) due to higher operating cost, stronger business volumes are set to drive its earnings higher, to be led by the retail segment. We expect PetDag’s earnings to grow at 4.5% three-year compound annual growth rate in FY13 to FY16E. Although gone are the days of distributing exceptionally high dividend payout of 85% to 94%, we still expect generous payout of 70% over FY14E to FY17E given its strong operating cash flow generating ability of above RM1 billion a year. This implies a decent net yield of 2.6% to 3.1%. This is also backed by a minimum 50% dividend payout policy.

Although we like its business model and generous earnings payout, we believe PetDag is fairly priced at the moment, although its share price has retreated 36% from the peak. Even then, it is not a stock to be ignored given its parent is Petroliam Nasional Bhd and its status as an index stock.

In our opinion, this stock will remain as a core holding for investors’ portfolio benchmarking purposes. In addition, the share price downside is likely to be capped by steady earnings growth as the fear of declining jet fuel demand is overdone since it only makes up about 10% of the group’s revenue.

As such, we are initiating coverage on PetDag with a “market perform” rating and a target price of RM19.64, which implies calendar year 2015 22.7 times price-earnings ratio and around 50% premium to the market valuation. — Kenanga Research, Sept 10




This article first appeared in The Edge Financial Daily, on September 11, 2014.