M a l a y s i a Friday, 28 October 2016

INITIATE COVERAGE

Petronas Dagangan (PETD MK) BUY

A Solid Petronas Cash Cow
Share Price RM23.30
As a KLCI index stock and a market leader, PetDag’s earnings are projected to track Target Price RM26.50
Malaysia’s economy. We like PetDag as a clear cash flow winner in a lower-for-
Upside +13.7%
longer oil price period. Its strong cash position is made sustainable by: a) the
absence of subsidy receivables, b) minimal capex/opex, and c) better inventory
management. Our DDM-based target price assumes an 80% dividend payout, with COMPANY DESCRIPTION
room for dividend upside. Initiate coverage with a BUY and target price of RM26.50. The principal domestic marketing arm of
Petronas for downstream products in
 Brand of first choice. Petronas holds a 69.9% stake in Petronas Dagangan (PetDag),
retail, commercial, liquefied petroleum
which is its principal domestic marketing arm for downstream products. PetDag’s
gas (LPG) and lubricants.
mission is to be the brand of first choice for quality fuel products, with a strong network of
>1,000 petrol stations nationwide. As it is already a market leader, growth is expected to
be mild whereby growth in its business volume will track the Malaysian economy. We STOCK DATA
project net profit yoy growth of 9%, 5% and 5% for 2016-18 respectively. GICS sector Energy
Bloomberg ticker PETD MK
 Outstanding cash flow amid low oil prices. PetDag has entered into a sustained
period of strong cash flow since end-14, whereby its cash balance quadrupled to multi- Shares issued (m) 993.5
year highs of RM1.8b-2b from 2011-13 levels, translating into >RM1.80 cash/share. The Market cap (RMm) 23,147
key factors are: a) solid adherence to Petronas’ strategy on minimal capex/opex Market cap (US$m) 5,546
spending, b) management’s key focus to halve inventory holdings to 4-6 days, 3-mth avg daily turnover (US$m) 2.1
minimising the impact of volatile oil price movements on margins, and c) the removal of
subsidies for retail pump prices has slashed the legacy subsidy receivables (2015: Price Performance (%)
<RM0.3b, 2013: RM2b). The receivables improvement is an indirect effect of lower oil 52-week high/low RM25.88/RM22.50
prices and resulted in the greatest positive impact on its cash conversion cycle. 1mth 3mth 6mth 1yr YTD
 Consistently paid out more than its dividend policy of 50%. PetDag is well-known (0.7) (0.7) (2.1) 0.0 (6.3)
as an index stock with quarterly dividend payouts. Going forward, we project an 80%
dividend payout, which is consistent with the group’s average payout of 89% in the past Major Shareholders %
five years. Our forecasts project a sustainable net cash balance of >RM1.7b (1H16: Petronas 69.9
RM2.3b), noting that a RM2b cash balance alone can support three years of annual EPF 5.0
dividend payments (DPS: RM0.60). Even with an increasing net cash position, ROE is
expected to remain stable at 17% based on our payout assumptions. FY16 NAV/Share (RM) 5.14
FY16 Net Cash/Share (RM) 1.79
 Initiate coverage with a BUY and target price of RM26.50, which implies 29x 2017F
PE, 15x 2017F EV/EBITDA and 2.8% 2017F dividend yield. Key assumptions in our
DDM-based target price are: a) 80% dividend payout on 3-year earnings CAGR of 5.7% PRICE CHART
(vs long-term growth of 4.5%), and b) cost of equity of 7.4% (risk-free rate: 4%, risk (lcy)
PETRONAS DAGANGAN BHD
(%)
PETRONAS DAGANGAN BHD/FBMKLCI INDEX
premium: 4.5%, beta: 0.8x). Share price upside depends on the likelihood of special 28.00 130

dividends.
26.00 120

KEY FINANCIALS
24.00 110
Year to 31 Dec (RMm) 2014 2015 2016F 2017F 2018F
Net Turnover 32,341 25,171 20,916 21,966 23,070 22.00 100

EBITDA 1,096 1,470 1,556 1,624 1,695

Operating Profit 728 1,094 1,171 1,230 1,292 20.00
6
90

Net Profit (Reported/Actual) 502 790 794 904 948 4

Volume (m)
Net Profit (Adjusted) 514 792 863 904 948 2
EPS (sen) 51.7 79.7 86.8 91.0 95.4 0
PE (x) 45.1 29.2 26.8 25.6 24.4 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16

P/B (x) 4.9 4.7 4.5 4.4 4.2 Source: Bloomberg

EV/EBITDA (x) 20.1 15.2 13.9 13.2 12.5
Dividend Yield (%) 2.6 2.6 2.7 3.1 3.3
Net Margin (%) 1.6 3.1 3.8 4.1 4.1
Net Debt/(Cash) to Equity (%) (28.3) (21.1) (34.7) (36.8) (40.8)
ANALYST
Interest Cover (x) 52.2 109.4 189.9 172.8 146.2
ROE (%) 10.5 16.3 15.8 17.4 17.6 Kong Ho Meng
Consensus Net Profit - - 867 912 928 +603 2147 1987
UOBKH/Consensus (x) - - 1.00 0.99 1.02 homeng@uobkayhian.com
Source: PetDag, Bloomberg, UOB Kay Hian

Refer to last page for important disclosures. 1

M a l a y s i a Friday, 28 October 2016

Investment Highlights
Generates value from volume. PetDag has the advantage of its parent’s multi-distribution A proxy to the Malaysian economy; focus
network that includes >1,000 petrol stations and 760 Kedai Mesra convenience stores, vs on value enhancement in both fuel demand
rival Shell’s >900 stations. With a leading market share of about 40% for all its business and non-fuel consumer spending
segments combined, PetDag is a proxy to the Malaysian economy on both fuel demand and
non-fuel consumer spending. As the industry (based on fuel stations and commercial fuel
demand) is mature, we expect PetDag’s revenue base to normalise and track Malaysia’s
economic growth. The company is focusing on value enhancement in its next growth phase.
This includes: a) more high-margin corporate customers, b) expanding the lubricants
business, c) better liquefied petroleum gas (LPG) cylinder turnaround, and d) solidifying its
retail brands (PRIMAX fuels, DYNAMIC diesel). Also, the non-fuel income sources at its
stations (Kedai Mesra, F&B chains, ancillary services) offer long-term potential for
diversification. We expect an average 5% yoy volume growth based on the growth of the
Malaysian economy. Coupled with cost management efforts, we project a 9%, 5% and 5%
net profit yoy growth in 2016-18 respectively.
Outstanding cash flow generation amid low oil prices. Since oil prices fell below Cash quadrupled to RM2b since 2014 due
US$100/bbl in late-14, the company implemented various strategies that resulted in a to key management strategies and
remarkable improvement in its cash flow. Its cash balance quadrupled to multi-year highs of benefitting from low oil prices
RM1.8b-2b from 2011-13 levels, vs a low of RM200m in borrowings. As management
remains focused on these strategies, we expect the current strong cash position to be
sustainable. These strategies are:
a) solid adherence to Petronas’ strategy on minimal capex/opex spending (PetDag achieved
more than 15% reduction in capex, and cut opex by 30% to about RM300m per quarter),
b) inventory holdings down to 4-6 days from 8-9 days, reducing the timing impact on volatile
oil price movements on its margins, and
c) the removal of subsidies on retail pump prices greatly reduced the legacy subsidy
receivables (RM2b out of the RM4b total receivables, reduced to <RM0.3b) and improved
receivables collection. We opine the receivables improvement was an indirect effect of
low oil prices, but proved to be the greatest positive impact on its structural change and
strong cash flow position since 2014.
Consistent dividends. PetDag has a dividend policy of a minimum 50% payout on a Consistently exceeds its 50% dividend
quarterly basis. However, it had consistently paid about 89% on average for the past five payout policy. We are expecting 80%
years. Adding on to our previous point, we argue that its cash flow strength matters. At our payout on sustainable cash balance
forecasts of RM1.9b and RM2.1b gross cash balance for FY16-17 (1H16: RM2.3b), PetDag
can sustain its annual RM0.6b dividends (DPS: RM0.60) for the next three years.
Upside to our dividend assumption. Almost all of PetDag’s cash balance is typically held Potential for special dividends
in in-house accounts, managed by Petronas Integrated Financial Shared Services Centre to
earn interest. Assuming a 4% interest rate, annual interest income would amount to RM80m-
90m and represents 10% of group net EPS of RM0.80-0.91. Considering that Petronas is
always in need to fund its own dividend obligations (2016: RM16b, 2017: RM13b), if we
assume PetDag pays out an additional RM1b as special dividends, this could result in a
special DPS of RM1.00 (~4% yield).

Refer to last page for important disclosures. 2

M a l a y s i a Friday, 28 October 2016

Valuation
Initiate coverage with a BUY and target price of RM26.50, or a 13% upside to current Our RM26.50 target price implies 29x
price levels. This implies 29x 2017F core PE (+1SD of 3-year forward PE) and 5x 2016F P/B. 2017F PE and 15x EV/EBITDA, and based
Dividend yield is implied at 2.8%, based on an 80% payout which is above the company’s on DDM and 80% dividend payout
minimum policy of 50%. We believe the premium valuation is well-deserved as PetDag’s
sustainable cash flow position is the highlight in our investment thesis.
DDM valuation. As an index stock with quarterly dividend payouts and market leadership,
we feel the DDM valuation is the most appropriate methodology. Key assumptions are: a)
80% dividend payout on 3-year earnings CAGR of 5.7%, and b) cost of equity of 7.4% (risk-
free rate: 4%, risk premium: 4.5%, beta: 0.8x).

FIGURE 1: DIVIDEND DISCOUNT MODEL ASSUMPTIONS

Risk-free rate 4.0%
Beta 0.75x
Equity market risk premium 4.5%
Cost of Equity 7.4%
2017-20F earnings growth 5.7% (long-term growth: 4.5%)
2016F EPS RM0.87
Dividend payout ratio 80%
Target Price on 993m shares RM26.50
Source: UOB Kay Hian

Improving ROE. Even though we forecast an increase in its net cash position, PetDag is
expected to improve its ROE towards 17-18%. Gross gearing is likely to remain low. The
borrowings incurred to fund the legacy subsidy receivables were paid off in end-14. Also, the
minimal capex expansion plans do not warrant a need for further loan drawdowns.
No suitable direct peers. PetDag’s businesses lies in the O&G downstream value chain
and represent consumer spending in the fuel and non-fuel segments. Petron Malaysia and
Shell Refining are the most direct rivals as they are local operators of fuel stations but their
market capitalisation is too small. We identify regional peers Petrovietnam Gas (the largest
LPG supplier in Vietnam) and Bangchak Petroleum (operates >1,000 stations in Thailand).

FIGURE 2: PEER COMPARISON – DOWNSTREAM O&G PLAYERS AND CONSUMER COMPANIES

Market Cap PE (x) P/B (x) EV/EBITDA (x) ROE (%) Dividend Yield (%)
Ticker (US$m) 2015 2016F 2017F 2015 2016F 2017F 2015 2016F 2017F 2015 2016F 2017F 2015 2016F 2017F
Station/LPG Operators
Petrovietnam Gas GAS VN 5,808.1 8.2 20.3 16.9 1.7 3.0 2.8 3.8 10.1 8.6 21.6 16.1 18.7 8.3 4.4 4.4
Bangchak Petroleum BCP TB 1,217.0 11.0 8.6 7.7 1.3 1.1 1.0 6.0 5.4 4.9 12.1 13.0 13.1 6.1 5.1 5.6
Petron PETRONM MK 273.1 6.1 n.a. n.a. 1.4 n.a. n.a. 3.5 n.a. n.a. 25.3 n.a. n.a. 0.0 n.a. n.a.
Shell Malaysia SHELL MK 219.5 4.2 0.6 0.4 2.2 n.a. n.a. 3.4 n.a. n.a. 70.2 n.a. n.a. 0.0 n.a. n.a.

Petronas Subsidiaries
Petronas Dagangan PETD MK 5,556.1 29.2 26.8 25.6 4.7 4.5 4.4 29.7 27.2 25.6 16.3 15.8 17.4 2.6 2.7 3.1
Petronas Chemical PCHEM MK 13,373.5 20.8 20.9 19.0 2.3 2.1 2.0 12.4 10.2 9.4 11.7 10.5 10.7 2.5 2.4 2.6
Petronas Gas PTG MK 10,354.1 22.6 24.0 23.7 3.9 3.6 3.4 15.1 13.9 13.4 18.1 15.2 14.6 2.6 2.8 2.9
MISC MISC MK 8,135.5 12.1 16.8 16.5 1.0 0.9 0.9 9.9 9.4 8.8 7.8 7.6 5.4 4.0 1.8 1.9
Gas Malaysia GMB MK 808.9 27.1 23.5 22.6 3.5 3.5 3.5 14.3 12.7 12.3 10.7 14.7 15.3 3.2 4.3 4.4
MMHE MMHE MK 392.4 17.7 19.4 19.4 0.6 0.6 0.6 5.2 7.2 6.9 1.6 3.1 3.0 0.0 0.0 0.0

Downstream O&G
Dialog Group DLG MK 1,951.1 28.1 26.3 23.3 3.5 3.2 3.0 24.8 24.9 23.6 13.4 13.3 13.8 1.5 1.6 1.8
KNM Group KNMG MK 209.1 19.2 19.5 9.8 0.4 0.3 0.3 6.5 10.3 7.7 2.0 1.5 3.3 0.0 0.2 0.2
Petron = Petron Malaysia Refining & Marketing
MMHE = Malaysia Marine And Heavy Engineering Holdings
Source: Bloomberg, UOB Kay Hian

Refer to last page for important disclosures. 3

M a l a y s i a Friday, 28 October 2016

Business Outlook
Key businesses. PetDag’s products and services span across four key segments – retail, Retail: >50% revenue, 43-44% volume
commercial, LPG and lubricants. Retail is the group’s largest revenue segment as it has both
Commercial: >40% revenue, 44-45%
fuel and non-fuel income sources from its petrol stations. The commercial business
volume
comprises many products and services used by various industries. The LPG segment
contributes about 5% revenue on 11-12% volume, and this segment is subsidised. The LPG: <10% revenue, 11-12% volume
lubricants segment is very small (1% volume), but is also the fastest-growing (refer to
Lubricants: negligible
Appendix for the volume breakdown of its products).

FIGURE 3: ACHIEVEMENTS AND KEY BUSINESS PLANS (2015-19)

Source: PetDag, UOB Kay Hian

Retail: Focus on branding. PetDag’s >1,000-station network commands >30% retail PetDag has a vast network of >1,000
market share, and is larger than Shell’s >900 stations. PetDag’s stations are operated under PETRONAS stations, riding on the demand
the “company owned/dealer operated” model. The new environment of market deregulation of vehicle usage growth
has resulted in volatile retail demand for both diesel and Mogas (gasoline). For instance, the
narrowing price differential between RON95 and RON97 resulted in customers switching
between the two fuel products. There were also instances where customers switched from
retail diesel to commercial products with more competitive pricing. Hence, PetDag’s strategy
going forward is branding enhancement vs volume. It will open only 10-20 new stations per
year vs the 40-50 stations in the past. As there are only few local fuel station operators, we
expect PetDag’s retail business to grow in line with Malaysia’s demand for fuel as well as
vehicle volume growth. Although there is no specific industry growth forecast for stations, the
Malaysian Automotive Association expects 2.2%-3.0% growth in total car industry volume
annually until 2020.

Refer to last page for important disclosures. 4

M a l a y s i a Friday, 28 October 2016

Non-fuel income: A long-term diversification. More than just a complementary offering, Non-fuel sources, ie convenience stores,
PetDag aims to achieve a one-roof convenience for customers. We see long-term restaurants and ATM machines, are long-
diversification potential as it expands on various non-fuel avenues peg to the footfall from term diversified income sources
vehicle refuelling at petrol stations. With this relationship to consumer spending, its many key
partners, such as Starbucks, McDonalds, and most recently Kenny Rodgers and Roti Boy,
are important. The non-fuel income sources are key contributors to the retail business’ other
income (30-50% of retail EBIT). The group has now close to 100 quick serve restaurants,
located in about 10% of its stations. The Kedai Mesra stores contributed >RM1b in
chargeable annual sales which translate into >8% of retail revenue and 4% of group revenue.
Even during periods of weak consumer spending, non-fuel revenue recorded a 4% growth in
2015. We expect the same level of growth trajectory going forward although management
will selectively expand non-fuel avenues depending on the viability and suitability of the
stations.

FIGURE 4: RETAIL PRODUCT OFFERINGS

Category Product/Service Offering Remarks

RON95 (Primax 95 with Advanced Energy formula)

>1,000 stations, about 30% retail
Fuel RON97 (Primax 97 Euro 4M with Advanced Energy formula)
market share
Diesel (Dynamic Diesel; Euro 5 by 2H16)

Convenience stores (Kedai Mesra) >760

Quick Serve Restaurants Close to 100
Non Fuel Banking facilities 1,549 ATM terminals
Terminal services 871 Touch ‘n Go
Cards (Loyalty card, fleet card, gift cards etc) 1,025 cashless payment
Source: PetDag

Commercial: To maintain leadership (>65% market share), leveraging on its long- As a market leader (>65% share), its
standing relationships with corporate customers. Aside from diesel, aviation fuel, bitumen, commercial products are a proxy to various
fuel oil, kerosene and Mogas, PetDag expanded its commercial products with Petroleum sectors like aviation, construction and
Coke and Sulphur. The group will continue to secure more corporate accounts in higher-yield utilities
segments. PetDag is the preferred partner in the aviation industry, securing new Jet A-1
contracts with customers such as Lufthansa and British Airways. It is a proxy to major
sectors such as aviation and infrastructure, via projects like MRT and Pengerang. We
forecast a 5% annual volume growth in the commercial business. However, we are mindful
that demand in the commercial segment contains many moving parts (ie demand could
fluctuate for diesel upliftment from upstream O&G customers and seasonal activities in
marine and fishery).
LPG: Malaysians love to eat! PetDag’s LPG is Malaysia’s No.1 cooking gas with a market PetDag’s market share of >57% in LPG will
share of >57%. This is supported by its eight domestic LPG bottling plants and efforts to remain as a key proxy to Malaysia’s
increase cylinder turnaround time. Also, its LPG operation in the Philippines has the second cooking gas demand
largest market share in the Visayas and Mindanao regions. Although LPG revenue is small, it
is a significant contributor to bottom line (20% of 2015 net profit, from 16% in 2014).
Lubricants: To capture more OEMs. With about 25% market share in lubricants, we expect Consolidated lubricants businesses into a
PetDag to continue to grow its market share via brands like the Syntium products (car motor single entity to focus on growing market
oil), Urania (commercial vehicle lubricants) and >67 LubeXperts workshops for the high- share in key target segments
street segment. However, competition remains stiff. PetDag also has a lubricant business in
Thailand with partnerships in OEM. To optimise cost, the lubricants businesses were
consolidated into one entity and renamed as Petronas Lubricants Marketing (Malaysia) SB.

Refer to last page for important disclosures. 5

M a l a y s i a Friday, 28 October 2016

THE KEY DETERMINANT: AUTOMATIC PRICING MECHANISM

Volume matters in this industry! The automatic pricing mechanism (APM), in place since Based on the APM formula, margins (in
1983, stabilises prices of RON95 Mogas, diesel and LPG in Malaysia by ensuring that the RM/litre) are fixed albeit thin
differential between retail prices and product costs (costs of refined O&G products are
correlated to oil prices) is made up by subsidies/duties. Operating margins, albeit thin, are
fixed in RM/litre. Under deregulated market conditions, having a strong market share and a
strong parental multi distribution capability matters and bodes well for the group.
APM protects the company’s profit margins. After the government ended subsidies in Margins remain intact despite significant
Dec 14 due to lower oil prices, the APM effectively functions like a managed float mechanism. changes in MOPS and the subsidy/duty
As we can observe, although PetDag’s revenue declined in line with the downtrend in element since Dec 14
average selling prices (due to MOPS), profit per volume of retail fuel sold at its stations
remains intact. This is because the pricing framework on margins for oil operators remains
similar. The only element in the APM that has changed materially in response to falling
MOPS is the subsidy/duty element, ie the “balancing item” to achieve the desired retail price
set by the government. (Please refer to our section on Key Cash Flow Strategies that
highlight how PetDag’s improves its cash flow margins further after Dec 14).

FIGURE 5: RETAIL FUEL (RON95) PRICES BASED ON APM (AS AT OCT 13 , AND MAR 15)
Ron 95 Value Ron 95 Value
APM Components Definition Determinant Oct 13 (RM) Mar 15 RM)
(A) Product Cost Based on Mean of Platts Singapore (MOPS), an index used to compute the daily Variable, based on MOPS (+) 2.359 (+) 1.65
average of transactions of downstream petroleum products. MOPS is correlated (average)
to oil prices and accounts for the refinery costs.
(B) Alpha This refers to a fixed buffering gap between MOPS prices and purchase prices of 5 sen/litre for Mogas Included in A Included in A
Malaysian oil companies. If prices of the petroleum products are higher than the 4 sen/litre for diesel
MOPS by an amount greater than Alpha, the oil company bears the extra cost.
(C) Operational Cost Covers transport and marketing costs of petroleum products. Set at RM0.0954 Peninsular: 9.54 sen/litre (+) 0.0954 (+) 0.0954
(US$0.03) per litre for Peninsular, ie RM0.0692 for marketing and RM0.0262 for Sabah: 8.98 sen/litre
distribution. Sarawak: 8.13 sen/litre
(D) Oil Companies’ This represents the fixed margins earned by oil companies to undertake 5 sen/litre for Mogas (+) 0.05 (+) 0.05
Margins transactions of APM products to the retail segments. 2.25 sen/litre for diesel
(E) Station This represents the margins made by station operators and dealers. 12.19 sen/litre for Mogas (+) 0.1219 (+) 0.1219
Operators’ Margins 7.00 sen/litre for diesel
(F) Duty/(Subsidy) The balancing item. Duties can be imposed by the government or subsidies to be 58.62 sen/litre for Mogas (max) (-) 0.5263 (+) 0.05
borne by the government, either way will depend on the movement of product 40.00 sen/litre for diesel (max)
costs as detailed in (A).
Actual Price Formula = A + C + D + E 2.63 1.92
Retail Price Formula = A + C + D + E – F 2.10 1.97
Source: The Ministry of Domestic Trade, Cooperative and Consumerism (KPDNKK), Shell Malaysia

FIGURE 6: FUEL PRICES

(RM/litre)
3.10
2.90
2.70
2.50
2.30
2.10
1.90
1.70
1.50
1.30
1.10 RON97 RON95
0.90 RON92 Diesel
0.70 Euro 5 Diesel
0.50
15 Oct 2008

10 Oct 2012
Before 1990s

1 Mar 2003

31 Jul 2005

5 Jan 2011

5 Apr 2012

7 Feb 2014

1 Jun 2015

1 Apr 2016
19 Nov 2014

1 Nov 2015
12 May

22 May

Source: Energypedia, UOB Kay Hian

Refer to last page for important disclosures. 6

M a l a y s i a Friday, 28 October 2016

Financials/Earnings Outlook
We forecast 2016-18 net profits of RM862m, RM905m and RM932m, implying yoy growth Forecast net profit yoy growth of 9%, 5%
of 9%, 5% and 5% respectively. As the industry adjusts to lower average selling prices post and 5% for the next three years
the subsidy rationalisation in 2014-16, revenue is expected to mainly track volume growth of
5% p.a. going forward. This assumes: a) PetDag’s business will grow in line with Malaysia’s
GDP growth of 4-5%, ie fuel (transportation) and non-fuel (consumer spending) demand, b)
addition of only 10-20 new fuel stations per year, and c) well-managed costs and fixed retail
fuel margins. There are no particular seasonal patterns although fuel stations may see higher
demand during festival periods when travel demand is stronger.

FIGURE 7: SEGMENTAL REVENUE AND EARNINGS FORECASTS

2013 2014 2015 2016F 2017F 2018F
Malaysia GDP Growth (%) 4.7 6.0 5.0 4.2 4.5 n.a.
Revenue (RMm) 32,341.9 32,341.0 25,171.2 20,916.0 21,966.3 23,070.1
Sales Volume (m litres) 16,332.9 15,760.7 15,094.3 15,852.3 16,648.9 17,486.0
- Retail (% share) 44 45 43 43 43 43
- Commercial (% share) 44 43 44 44 44 44
- LPG (% share) 11 11 12 12 12 12
- Lubricants (% share) 1 1 1 1 1 1
Core Net Profit (RMm) 830.0 513.7 791.8 861.7 904.7 932.2
- Margin (%) 2.6 1.6 3.1 4.1 4.1 4.0
- yoy % chg -3.9 -38.1 54.2 8.8 5.0 3.0
DPS (RM) 0.70 0.60 0.60 0.69 0.72 0.75
Dividend Payout (%) 74 113 79 80 80 80
ROE (%) 17.3 10.8 16.3 17.1 17.3 17.3
FCFE, Before Dividends (RMm) 983.7 2,060.4 23.2 1,280.9 897.7 1,013.8
Source: PetDag, UOB Kay Hian

Dividends and FCFE sustainable. Aligning to our dividend-play thesis, we believe Cash balance for 2016-17 are forecast at
forecasting PetDag’s cash flow is more important than its P&L. Cash position is poised to RM1.9b and RM2.1b (1H16: RM2.3b)
remain strong at RM1.9b and RM2.1b for 2016-17 (1H16: RM2.3b), with net cash equally
impressive at RM1.7b and RM1.9b (1H16: RM2.1b) respectively. This is due to: a) better
receivables position with the absence of major subsidy receivables, b) faster inventory
holding turnover, and c) capex and opex reductions. From 2015’s free cash flow to equity
(FCFE) of RM23.2m (due to the repayment of borrowings for the subsidies), we project
future FCFE at RM0.8b-1.2b for 2016-18. This supports our forecast dividend payout of 80%,
which is above its minimum 50% payout policy but in line with the average 89% payout in the
past five years. The cash balance position alone can support annual dividends of RM0.6b-
0.7b in the next three years.

FIGURE 8: NET GEARING FIGURE 9: CASH FLOW

(x ) (RMb)
0.3 3.5
Operating Cash Flow Inv esting Cash Flow
0.2 3.0
Financing/Div idends Cash
2.5
0.1
2.0
0.0 1.5
-0.1 1.0
-0.2 0.5
0.0
-0.3
-0.5
-0.4 Gross Debt-to-equity
Net Debt-to-equity -1.0
-0.5 -1.5
10 9M11 12 13 14 15 16 17 18 9M11 12 13 14 15 16 17 18

Source: PetDag, UOB Kay Hian Source: PetDag, UOB Kay Hian

Refer to last page for important disclosures. 7

M a l a y s i a Friday, 28 October 2016

KEY CASH FLOW STRATEGIES

Strategy A: Opex/capex cuts. As a subsidiary of Petronas, PetDag adheres to the group’s PetDag follows Petronas’ strategy to
strategy of a 15-20% capex and 30% opex reductions. PetDag’s ongoing capex is very minimise opex/capex spending
minimal, vs historical annual capex allocations of RM0.4b-0.5b for domestic operations and
RM0.2b for overseas units. For opex, guidance is on a sustainable RM0.3b per quarter,
mainly in marketing, and repair and maintenance costs.
Strategy B: Inventory management. The monthly fuel selling prices under the APM are Quicker inventory turnover aligns actual
based on the average MOPS product costs in the previous month. PetDag’s actual inventory product costs to selling prices
cost is based on MOPS in the early weeks of the current month. Ideally, the subsidy/duty
Example for RON 95, Dec 14 (RM/litre)
element is the balancing item that should bridge the gap between what consumers pay
MOPS, Nov 14 (APM) : 2.23
(average MOPS of the previous month) and the inventory costs borne by oil operators
(MOPS at the current month). However, in reality, the subsidy/duty elements are not Duty by government : (0.30)
adjusted according to the correct time periods in this manner. (1) Actual pump price : 1.93
(2) PetDag’s purchase cost : 1.99
In response, PetDag has reduced its inventory holding target to 4-5 days (from 8-9 days) to of inventory based on
align its own product costs to selling prices. An illustration (see RHS table) shows a historical
MOPS @ 10 Dec 14
pattern where: a) a sharp uptrend/downtrend in oil prices improves/reduces margins due to
Inventory gains/(loss) (1-2): (0.06)
inventory lag gains/losses, and b) volatile oil prices within a short period are negative for
margins. For example, PetDag’s 4Q14 profit was hit by lag losses of close to RM200m at the
gross profit level due to the sharp fall in MOPS. With a shorter inventory holding period,
PetDag will be less exposed to inventory lag gains/losses. We note its EBIT was stable in
2015 (revenue fell but margins expanded) despite the volatile MOPS trend.
Strategy C: Stronger receivables position. In Dec 14, the government altered the APM to The absence of subsidies for retail fuel
be a managed float mechanism. This effectively removed legacy subsidies on retail pump since Dec 14 effectively cut RM2b subsidy
prices, which were significant at RM2b (vs total receivables of RM2b) prior to 4Q14. In the receivables to <RM0.4b
past, these legacy subsidy receivables were sometimes outstanding by more than three
Oil prices projected to increase mildly to
months. This is evident as: a) in 2Q16, PetDag impaired RM89.9m of subsidy receivables
US$50-60/bbl. Hence, major subsidies are
claimed for diesel, which were outstanding since 2012-13 and the decision for a repayment
unlikely to return
from the government is still pending approval, and b) in 2013, PetDag had to utilise RM400m
of the RM2b sukuk programme to fund these receivables; these loans were repaid in 2014.
We understand current subsidy receivables have declined to <RM0.3b and come from the
other non-retail segments like subsidised LPG and fisheries. All in all, although oil prices are
forecast to improve to US$55/bbl in 2017, we deem it to be within a lower-for-longer situation
and see a low likelihood that retail fuel will return to being heavily subsidised. This supports
healthy receivables days.

FIGURE 10: EBITDA MARGIN, INVENTORY AND OIL PRICES FIGURE 11: RECEIVABLES AND OIL PRICES

(US$/bbl) (RMb)
25 160 6 160
Invento ry Ho lding Days, x (LHS) To tal Receivables (LHS)
B rent US$ /bbl (RHS) 140 Subsidy Receivables (LHS) 140
5
20 EB ITDA M argin, % (LHS) A verage B rent, US$ /bbl (RHS)
120 Receivable Days, x (RHS) 120
4
15 100 100
80 3 80
10 60 60
2
40 40
5
1
20 20
0 0 0 0
09 10 11 12 13 14 15 16 10 9M11 12 13 14 15 16 17 18

Source: PetDag, UOB Kay Hian Source: PetDag, UOB Kay Hian

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M a l a y s i a Friday, 28 October 2016

Financial Statement
FIGURE 12: PROFIT & LOSS
Year to 31 Dec (RMm) 2014 2015 2016F 2017F 2018F
Revenue, Net 32,341 25,171 20,916 21,966 23,070
Operating Expenses (30,432) (23,138) (19,117) (20,077) (21,086)
EBIT 728 1,094 1,171 1,230 1,292
Other Non-operating Income (12) (2) (92) - -
Net Interest Income/(Expense) (21) (13) (8) (9) (12)
Associate Contributions & JVs 2 4 4 4 4
Pre-tax Profit 709 1,085 1,075 1,224 1,284
Tax (201) (290) (277) (315) (330)
Minorities (7) (5) (5) (5) (6)
Net Profi (Actual) 514 792 863 904 948

Depreciation & amortisation (368) (376) (384) (394) (404)

EBITDA 1,096 1,470 1,556 1,624 1,695
Adjusted EBITDA 1,108 1,472 1,625 1,624 1,695
Source: PetDag, UOB Kay Hian

FIGURE 13: BALANCE SHEET

Year to 31 Dec (RMm) 2014 2015 2016F 2017F 2018F
Cash/Near Cash Equivalent 1,840 1,259 1,971 2,213 2,535
Accounts Receivable/Debtors 2,119 1,649 1,652 1,953 2,121
Stocks 1,032 626 471 468 491
Other Current Assets 0 33 0 0 0
Current Assets 4,991 3,566 4,094 4,633 5,146
Fixed Assets 4,031 3,990 3,862 3,740 3,625
Investments 10 13 13 13 13
Other Non-current Tangible Assets 0 0 0 0 0
Total Non-current Assets 10 13 13 13 13
Total Assets 9,541 8,071 8,462 8,869 9,256

Accounts Payable/Creditors 4,022 2,565 2,732 2,870 3,014

Short-term Debt/Borrowings 360 98 20 60 35
Other Current Liabilities 63 129 204 219 234
Current Liabilities 4,445 2,793 2,956 3,148 3,283
Long-term Debt 135 113 178 206 264
Other Non-current Liabilities 169 180 180 180 180
Total Non-current Liabilities 304 294 358 387 445
Total Liabilities 4,749 3,087 3,314 3,535 3,728
Minority Interest - Accumulated 40 32 36 42 47
Shareholders' Equity 4,752 4,952 5,111 5,292 5,481
Liabilities & Shareholders' Funds 9,541 8,071 8,462 8,869 9,256
Source: PetDag, UOB Kay Hian

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M a l a y s i a Friday, 28 October 2016

FIGURE 14: CASH FLOW

Year to 31 Dec (RMm) 2014 2015 2016F 2017F 2018F
Operating Cashflows 2,513 621 1,558 1,130 1,296
Pre-tax Profit 709 1,085 1,167 1,224 1,284
Depreciation & Amortisation 341 368 376 384 394
Associates 2 4 4 4 4
Working Capital Changes 1,787 (581) 319 (160) (47)
Non-cash Items - - - - -
Others (527) (544) (608) (638) (669)
Cash from Investing Activities (381) (235) (215) (229) (244)
Capex (Growth) (350) (293) (281) (295) (310)
Investments (42) (21) (14) (14) (14)
Proceeds from Sale of Assets 0 (7) 0 0 0
Others 11 86 81 81 81
Cash from Financing Activities (661) (921) (654) (660) (731)
Dividend Payments (551) (616) (635) (723) (758)
Issue of Shares 0 0 0 0 0
Proceeds from Borrowings 0 0 0 0 0
Loan Repayment (104) (305) (19) 63 28
Others/Interest Paid (6) 0 0 0 0
Net Increase/(Decrease) in Cash 1,471 (535) 713 241 322
Beginning Cash 359 1,840 1,259 1,971 2,213
End Cash 1,840 1,259 1,971 2,213 2,535
Source: PetDag, UOB Kay Hian

FIGURE 15: KEY METRICS

Year to 31 Dec (%) 2014 2015 2016F 2017F 2018F
Growth
Turnover (0.0) (22.2) (16.9) 5.0 10.3
EBITDA (25.2) 34.1 5.8 4.4 9.0
Pre-tax Profit (36.1) 52.9 (0.9) 13.9 19.5
Core Net Profit (38.2) 54.2 8.9 4.8 4.9

Profitability
EBITDA Margin 3.4 5.8 7.4 7.4 7.3
EBIT Margin 2.3 4.3 5.6 5.6 5.6
Gross Margin 5.9 8.1 8.6 8.6 8.6
Pre-tax Margin 2.2 4.3 5.6 5.6 5.6
Net Margin 1.6 3.1 4.1 4.1 4.1
ROE 10.5 16.3 17.1 17.3 17.9
ROA 5.1 9.0 10.4 10.4 10.7
ROIC 9.8 15.4 15.2 16.7 17.2
RONTA 9.5 14.2 15.2 15.9 16.2

Leverage
Interest Cover (x) 52.2 109.4 189.9 172.8 146.2
Debt to Total Capital 10.3 4.2 3.8 5.0 5.4
Debt to Equity 10.4 4.3 3.9 5.0 5.5
Net Debt/(Cash) to Equity - - - - -
Current Ratio (x) 1.1 1.3 1.4 1.5 1.6
Source: PetDag, UOB Kay Hian

Refer to last page for important disclosures. 10

M a l a y s i a Friday, 28 October 2016

Appendix I: Risk Factors

Oil prices recover to >US$80/bbl and major subsidies resume. A moderate rise in oil
prices could see a minor subsidy for monthly retail fuel prices, which is still manageable.
However, if oil prices surge and stay above US$80/bbl in the long term, the MOPS for Mogas
95 may revert to above >RM2.00/litre. In this scenario, there is a risk that the government
may re-introduce major subsidies to keep retail fuel prices low at about RM2.00 levels. This
could result in the return of subsidy receivables that had plagued PetDag’s cash flow in the
past.

MOPS (2015) MOPS (2014)

Source: PetDag Source: PetDag

Higher-than-expected opex. Depending on changes in market deregulation and the

adaptability of the Euro 5 requirements, PetDag may incur additional costs to upgrade its
petrol stations to meet future standards. Promotional activities to enhance its product brands
may also result in high marketing expenses.
Decline in demand. A prolonged weakness in the Malaysian economy and volatile outlook
in key sectors – aviation and infrastructure – can impact volume growth of PetDag’s products.
Lower-than-expected vehicle growth and usage such as from consumers shifting to public
transport and to avoid congestion taxes could reduce product demand.
Force majeure events. In end-14, major flash floods closed down about 40 stations in the
East Coast peninsular and affected PetDag’s retail business. Other events such as
regulatory enforcements and entry of major competitors could also disrupt PetDag’s product
demand.
Deregulation. In a full market deregulation, petroleum operators would be able to set prices
according to market forces. Any player that undercuts the market by charging pump prices
significantly below market prices could affect industry margins. This risk is likely to be
partially mitigated as we believe PetDag has the scale and good distribution capability to
compete on costs with its retail peers. Globally, the company is also facing intense
competition, given the lack of scale to compete with foreign competitors. For example, the
LPG markets in Vietnam and the Philippines are deregulated.

Refer to last page for important disclosures. 11

M a l a y s i a Friday, 28 October 2016

Appendix II: Company Background

CORPORATE STRUCTURE

Source: PetDag, UOB Kay Hian

Refer to last page for important disclosures. 12

M a l a y s i a Friday, 28 October 2016

PRODUCTS AND SERVICES

Source: PetDag, UOB Kay Hian

VOLUME BY SEGMENT (2015) VOLUME BY PRODUCT (2015)

Source: PetDag Source: PetDag

VOLUME BY SEGMENT (2014) VOLUME BY PRODUCT (2014)

Source: PetDag Source: PetDag

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M a l a y s i a Friday, 28 October 2016

MULTI DISTRIBUTION CAPACITY

Source: PetDag, UOB Kay Hian

BUSINESS PARTNERS IN NON-FUEL RETAIL

Source: PetDag, UOB Kay Hian

Refer to last page for important disclosures. 14

M a l a y s i a
BOARD OF DIRECTORS
Key Personnel
Mr Md Arif Bin Mahmood
Non-Independent Non-Executive Director
Mr Mohd Ibrahimnuddin Bin Mohd Yunus
MD/CEO
Mr Lim Beng Choon
Independent Non-Executive Director
Ms Vimala A/P V. R. Menon
Independent Non-Executive Director
Datuk Anuar Bin Ahmad
Non Independent Non-Executive Director
Mr Erwin Miranda Elechicon
Independent Non-Executive Director
Ms Nuraini Binti Ismail
Non Independent Non-Executive Director
Ir Mohamed Firouz Bin Asnan
Non Independent Non-Executive Director
Source: PetDag, UOB Kay Hian
Refer to last page for important disclosures.
Friday, 28 October 2016
Experience and Background
 Appointed to the board on 16 Apr 15. He was the Senior General Manager of PetDag’s retail business division.
 His vast experience in the oil & gas industry spans more than 30 years. He joined Petronas in 1984 and spent the
first 10 years of his career as a system/measurement engineer.
 Held various senior positions in Petronas including Senior Vice President of Corporate Strategy, Vice President of Oil
Business, Managing Director/Chief Executive Officer of ASEAN Bintulu Fertiliser Sdn Bhd, and General Manager
(Gas Processing – Plant B) of Petronas Gas Bhd.
 Served as CEO since 1 Feb 14. This is his second stint in PetDag as he has led the LPG business in 2005.
 Having been with Petronas for over 29 years, his professional experience spans across marketing and trading,
Human resource management as well as corporate affairs.
 Previously the CEO of Petronas LNG Sdn Bhd and prior to that the Head of Compensation and Benefits, Human
Resource Management, Petronas. He was also the CEO of PT Petronas Niaga Indonesia in 2007.
 Appointed to the board on 13 Aug 12.
 He was the Country Managing Director at Accenture. He held various positions during his 28-year tenure at
Accenture, including Managing Partner for Accenture’s Resources Industry Group in Southeast Asia.
 Currently, he serves as a Trustee in the ECM Libra Foundation, actively advising on their welfare initiatives. He is an
Independent Non-Executive Director on the boards of Petronas Gas Bhd and MISC Bhd.
 Appointed to the board on 18 Nov 11.
 She is a Chartered Accountant, a Fellow of the Institute of Chartered Accountants in England and Wales, and a
member of the Malaysian Institute of Accountants.
 She is currently a member of the Board of Trustees of Pemandu Corporation and a Senior Independent Non-
Executive Director, Audit Committee Chairman and a member of the Nomination and Remuneration Committee of
Petronas Chemicals Group Bhd.
 She is also an Independent Non-Executive Director and Audit Committee Chairman of Cycle & Carriage Bintang Bhd
and DiGi.Com Bhd.
 Appointed to the board on 1 Aug 14. Previously served as PetDag’s MD/CEO from 1 Jul 98 until 1 Oct 02.
 He joined Petronas in 1977 and held various senior managerial positions in the International Marketing Division and
Corporate Planning Unit of Petronas Trading Corporation Sdn Bhd and PetDag respectively.
 Also held the positions of Vice President of Oil Business, Vice President of Human Resource Management and
Executive Vice President of Gas and Power Business, Petronas. He was a member of the Petronas Executive
Committee, Petronas Management Committee, and on the Board of Petronas until he retired on 15 Apr 14.
 Appointed to the board on 1 Aug 14.
 Has 37 years of marketing and general management experience in the consumer goods, food service, advertising
and business process outsourcing across Asia. He began his career at Procter & Gamble Philippines (P&G) in 1979.
 He is currently Chairman of Assurant BPO Solutions, Inc., a Philippine business process outsourcing company. Also
a member of the Board of Directors of U-Bix Corporation, one of the Philippines’ largest integrated office systems and
service providers; and of Alliance Select Foods International, Inc., a leading canned tuna and smoked salmon
manufacturer.
 Appointed to the board on 18 Nov 11. She is a Fellow of the Association of Chartered Certified Accountants (ACCA),
UK.
 She joined Petronas in 1992 and is currently the Vice President of Treasury, Petronas. Prior to assuming this role,
she has held various senior positions in the Petronas Group including Senior General Manager, Group Treasury of
Petronas, General Manager, Finance and Account Services and General Manager, Commercial Services of
Malaysian International Trading Corporation Sdn Bhd.
 Appointed to the board on 6 Oct 15.
 Joined Petronas in 1989 and is currently the Vice President of Oil Business, a post held since Sep 15. He is
responsible for managing Petronas Oil Business which consists of refining, trading and marketing of crude and
petroleum products.
 Held several senior positions including Chairman of Petronas Sabah and Labuan, and Head of Sabah Operations
under Petronas Carigali Sdn Bhd. He was also the Country Chairman of Petronas Vietnam and General Manager of
Business Development, Corporate Planning and Development Division where he was responsible for planning,
identifying and evaluating new business opportunities, including mergers and acquisitions.
15
M a l a y s i a Friday, 28 October 2016

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Refer to last page for important disclosures. 17