PETRONAS DAGANGAN BHD

Target price: RM31

ANALYSTS expect Petronas Dagangan to generate stable operating margins in the coming years, with growing sales volume, post-implementation of effective inventory controls.

Its large network of retail stations should support further expansion in food & beverage offerings without any large capital expenditure (capex) requirements.

The group’s net cash position was solid at RM3.31 per share as at end 2017, or 12.7% of the last traded price.

Its business is divided into two major segments – petroleum retail and commercial (lubricant, diesel, aviation oil, etc).

The company is also the market leader in most of its business segments in Malaysia, with over 1,000 petrol stations, contributing 59.4% of total group EBIT. Non-oil revenue accounts for 10% of total group retail revenue.

Of note is the commercial division, which is the first non-Japanese lubricant company to be certified by Honda as its original equipment manufacturer, underlining its technical ability even among global players. The aviation oil business is still booming, with contracts signed with major airlines (AirAsia, Firefly and Malaysia Airlines), and continues to contribute to its division earnings.

There is also latent potential in untapped retail network with the Kedai Mesra outlets nationwide.

“In the future, we believe it has a huge advantage in providing more F&B offerings (i.e lunch sets or mini-café concepts) by merely capitalising on its existing store count,” the report stated.

The business contributes only 10% of total retail revenue now, but this is expected to increase to 20% by 2025.

Analysts added that the margins should remain stable over 2018-2020 due to lower inventory turnover days and their assumption that the automatic price mechanism will stay intact.