This article first appeared in The Edge Financial Daily on April 18, 2018

Petronas Dagangan Bhd
(April 17, RM26.78)
Upgrade to add with a target price of RM29.23: We hosted Petronas Dagangan Bhd (PetDag) on a two-day non-deal roadshow in Singapore last week, meeting 13 fund managers. Some investors said PetDag had been off their radar as they invest in growth stocks only, but that growth prospects for PetDag arising from Petroliam Nasional Bhd’s (Petronas) new 300,000 barrels per day (bpd) refinery at the Refinery and Petrochemical Integrated Development (Rapid) project in southern Johor had piqued their interest.

Colin Wong, the chief executive officer of Petronas Refinery and Petrochemical Corp, had said that from the expected first quarter of 2019 commissioning, the refinery will produce 220,000bpd of products, with Euro 5-compliant motor gasoline (mogas) and diesel each at 90,000bpd, with 40,000bpd of other products like jet fuel and so on. As Rapid’s output is in excess of domestic demand, half of it will ultimately be exported.  

We expect PetDag to get ample access to Rapid’s product output, and use it to penetrate more deeply into the commercial market. PetDag is looking to increase its already-large 60% plus market share of jet fuel sales from financial year 2019 by partially displacing Shell and Petron. There are opportunities to raise its share of the retail market too, with PetDag using the available Rapid mogas output to open more stations and engage in more promotional activities.

The latter option means that Petronas can capture a greater part of the value chain, since retail pricing is typically higher than wholesale pricing. But it will also need to build or invest in overseas retail distribution, which may involve PetDag if Petronas decides to go down this route. Given the scarcity of such assets, a deal is likely to be expensive and Petronas will have to evaluate its options.  — CGSCIMB Research, April 16