Petronas Dagangan face twin share de-rating threats — CGS

KUALA LUMPUR (May 8): Petronas Dagangan Bhd (KL:PETDAG) faces threat from Saudi Aramco’s possible entry into Malaysia’s fuel retailing market, on top of the impending withdrawal of fuel subsidies, CGS International warned.

Aramco is reportedly negotiating to acquire Shell’s 950 retail fuel stations in Malaysia, which if a deal materialises, could heighten competition in the country, CGS said. Aramco will rebrand the stations and will offer promotions to retain existing customers and attract new ones, it said.

That “could be a potential de-rating catalyst” for Petronas Dagangan, CGS said. While Petronas Dagangan has more than 1,000 retail fuel stations in Malaysia, Shell’s 950 stations probably register higher sales due to first-mover advantage and multiple strategic locations in high-traffic areas, it said.

Reuters reported on Monday (May 6) that Aramco has been in talks with Shell since late 2023 for the deal that could be worth up to US$1 billion (RM4.74 billion).

In 2012, Petron Corp of the Philippines acquired ExxonMobil’s Esso stations in Malaysia and went on to expand its network from 550 stations to 770 stations at present day. Its Malaysian venture company Petron Malaysia Refining & Marketing Bhd (KL:PETRONM) also rebranded the stations, and launched multiple promotional campaigns with loyalty points and prizes, CGS noted.

The result was that Petronas Dagangan’s retail fuel sales fell 2% in 2014 and 9% in 2015, while incurring higher advertising and promotional costs in order to keep up with Petron, CGS said. “Aramco could pursue a similar strategy as Petron,” it cautioned and maintained its “reduce” call on Petronas Dagangan.

In the nearer term, Petronas Dagangan is expected to report a decline in core net profit in the first three months of its financial year 2024 (1QFY2024), from RM302 million in the same quarter a year earlier (1QFY2023), due to suspension of flights by MYAirline and high commercial operating profits a year earlier, according to CGS.

On a quarter-on-quarter basis, CGS forecasts an increase in core net profit in 1QFY2024, from RM184 million in the final quarter of 2023 (4QFY2023), as a result of inventory gains and “wide” margin from the sale of jet fuel.

Further out, Petronas Dagangan will have to contend with a “high likelihood” of lower total volume of fuel subsidies by the Malaysian government from mid-2024, CGS said.

“We think that higher pump prices could encourage carpooling and disincentivise the unlawful moving of subsidised fuel to foreign countries,” which may ultimately reduce Petronas Dagangan’s sales volume, the research house said.

Petronas Dagangan’s retail sales volume probably grew 3% in 2023 and will see “zero growth” in 2024-2025, once retail diesel prices are no longer subsidised at the pump, “which may turn out to be optimistic,” CGS added.

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