PETRONAS DAGANGAN BHD

By CIMB Research Hold (no change) Target price: RM24.67

THE government’s Budget 2019 unveiled several initiatives to be implemented, which CIMB Research believes will hurt the future trajectory of Petronas Dagangan’s (PetDag) retail and commercial volumes.

The first was a rationalisation of the RON95 motor gasoline (mogas) subsidy programme that will take effect in the second quarter of 2019 (2Q19), while the second was the imposition of an aviation departure levy for international travellers.

From 2Q19 onwards, the government will limit the retail subsidies for RON95 to a narrower group of people and with clear volume limits.

The current subsidy programme is indiscriminate in terms of the type of people who can benefit from it and unlimited in terms of how much subsidy the government is willing to bear. As the subsidy borne by the government is expected to fall from 2Q19 onwards, the weighted average cost of fuel borne by consumers is expected to rise, potentially hurting sales volumes of RON95.

“For now, the government will keep the price of retail diesel fixed but, if our thesis on the new International Maritime Organization’ s global sulphur cap is correct, spot diesel prices and crude oil prices will rise and the government’s diesel subsidy will balloon in 2020.

“If this scenario materialises, we expect the diesel subsidy to be rationalised as well, leading to potentially lower retail sales volumes of diesel,” said CIMB Research. The government said in Budget 2019 that it will introduce a new aviation levy for international departures in mid-2019, which is on top of current airport Passenger Service Charges – likely to be increased in mid-2019.