Petdag earnings to be driven by volume

Performance likely to stabilise in second half of 2022

“Do note that jet fuel products are homogenous across the various brands, and hence, competition is stiff within this space.” Kenanga Research

PETALING JAYA: Post disposal of its working inventories, PETRONAS Dagangan Bhd’s (Petdag) earnings will no longer be exposed to inventory lag gains and losses, and will primarily be volume-driven.

Kenanga Research said this in a report to clients, adding that pricing mechanisms that have dragged the retail arm of Petroliam Nasional Bhd’s commercial segment for the past two quarters are expected to stabilise in the second half of the year.

Petdag is involved in the marketing of downstream oil and gas products.

In its report, Kenanga Research said from a recent site visit, it learnt that typically, commercial clients use a “look-back” mechanism in determining product prices, which may vary from spot prices.

“This has resulted in two consecutive quarters of losses in the past for its commercial segment, despite improved sales volumes.

“Do note that jet fuel products are homogenous across the various brands, and hence, competition is stiff within this space.

“That said, we expect performance from this segment to stabilise going into the second half of the financial year 2022 (2H22) given the easing of oil prices off its peak

On the whole, Kenanga Research said it returned from its site visit feeling “neutral”, with its view on the stock largely unchanged.

“As such, we made no changes to our forecasts and maintain ‘market perform’ with an unchanged target price of RM22.25.”

Risks to its call include the removal of fuel subsidies, which could hurt fuel consumption, a global recession that could dampen fuel demand and the resurgence of movement restrictions due to Covid-19.

Meanwhile, RHB Research in its report, also said it was keeping its call of “neutral” on the stock.

It said it saw a “high level of compliance” of health and safety policies, coupled with an increasing emphasis on sustainability efforts.

It warned that despite a sales volume recovery, Petdag’s operating cash flow may remain volatile in the near-term.

“Petdag is still in closed discussions with the government on a potential targeted subsidy and the implementation timeline remains uncertain.

“At the same time, the company is also negotiating with the government to recoup a delayed fuel subsidy payment,” it said.

Recall the company’s operating cash flow had declined by Rm551mil in the second quarter of 2022 as the increase in trade receivables was offset by a spike in trade payables.

“Hence, we may continue to see a rather volatile operating cash flow, mainly from the escalated fuel subsidy from the government amidst higher product prices,” said RHB Research.