This article first appeared in The Edge Financial Daily on November 8, 2017

Petronas Dagangan Bhd
(Nov 7, RM22.46)
Maintain hold with a lower target price (TP) of RM24.25: Given the maturity of the industry and potential earnings downside risks arising from further sector liberalisation, we do not foresee any near-term rerating catalyst for Petronas Dagangan Bhd (PetDag) at this juncture.

Our TP is conservative because we are concerned about growth prospects for the industry, particularly for PetDag’s retail segment, in view of the increased popularity of fuel-efficient and electrical vehicles, improved public transport infrastructure in Malaysia and rising acceptance of e-hailing services.

We have a higher dividend per share assumption on its strong balance sheet, curtailed expansion plan and strong cash flow. Potential catalysts include active capital management.

PetDag has moderated its expansion to five to 10 stations per annum (from 15). Management has undertaken measures to keep operating expenditure at RM300 million to RM320 million a quarter.

Our “hold” rating is premised on the limited upside to our TP of RM24.25, pegged at 25.5 times financial year ending Dec 31, 2017, earnings, a 15% discount to its historical mean price-earnings (PE) valuation. PetDag lacks rerating catalysts for now. Its PE valuation could derate from its high historical mean PE valuation (about 30 times). Further industry liberalisation could impact its profit outlook.

Meanwhile, management has implemented better inventory management and brought down the average inventory turnaround to about five days from 10. PetDag will not be subject to high earnings volatility due to inventory gains/losses arising from oil price movements. — AllianceDBS Research, Nov 7