PETDAG (5681) : Petronas Dagangan - Fuel up!
Target RM20.80 (Stock Rating: ADD)
Contrary to what the market thinks, the government’s decision to put RON95 petrol and diesel on a managed float system is positive for petroleum retailers, including PetDag. The managed float system will lead to the removal of subsidy receivables, thus potentially improving PetDag’s cash flow. Also, the automatic pricing mechanism (APM) remains in place, ensuring PetDag a fixed company margin of 5 sen/litre. In view of the sharp share price fall since the managed float system was announced on 21 Nov, we upgrade our call from Hold to a trading-oriented, non-consensus Add while maintaining our forecasts and target price. We continue to value the stock at 21.2x CY16 P/E, still at a 30% premium over our target market P/E of 16.3x.
What Happened
On 21 Nov, the government announced its decision to fix on a managed float system the retail prices of RON95 and diesel. The current retail prices are RM2.30/litre for RON95 and RM2.20/litre for diesel.
What We Think
We view favourably the government’s decision and its subsequent impact on petroleum retailers, PetDag included. In a knee-jerk reaction to the 21 Nov announcement, PetDag’s share price dropped 5% to close at RM17.44 before hitting a 52-week low of RM16.54 this morning. The share price has slumped 42% since our downgrade from Add to Hold on 6 May.
We have confirmed with PetDag’s management that the automatic pricing mechanism (APM) is intact and that the company will continue to collect a fixed company margin of 5 sen/litre for RON95. More importantly, the managed float system will result in the absence of subsidy receivables, thus potentially improving the company’s cash flow. Previously, subsidy payments from the government to PetDag took an average of two to three months.
Given the fall in the global oil prices, the gap between the retail and market prices has narrowed. Based on our calculations, the market price for RON95 as at 19 Nov stood at RM2.17/litre (Figure 1) while the market price average for the month up until 19 Nov was RM2.20/litre, 4% below the retail price.
What You Should Do
Take advantage of the sharp share price correction and accumulate PetDag shares. The managed float system is positive for PetDag, which could see an improvement in cash flow while it continues to benefit from the APM.
Source: CIMB Daybreak - 25 November 2014
Target RM20.80 (Stock Rating: ADD)
Contrary to what the market thinks, the government’s decision to put RON95 petrol and diesel on a managed float system is positive for petroleum retailers, including PetDag. The managed float system will lead to the removal of subsidy receivables, thus potentially improving PetDag’s cash flow. Also, the automatic pricing mechanism (APM) remains in place, ensuring PetDag a fixed company margin of 5 sen/litre. In view of the sharp share price fall since the managed float system was announced on 21 Nov, we upgrade our call from Hold to a trading-oriented, non-consensus Add while maintaining our forecasts and target price. We continue to value the stock at 21.2x CY16 P/E, still at a 30% premium over our target market P/E of 16.3x.
What Happened
On 21 Nov, the government announced its decision to fix on a managed float system the retail prices of RON95 and diesel. The current retail prices are RM2.30/litre for RON95 and RM2.20/litre for diesel.
What We Think
We view favourably the government’s decision and its subsequent impact on petroleum retailers, PetDag included. In a knee-jerk reaction to the 21 Nov announcement, PetDag’s share price dropped 5% to close at RM17.44 before hitting a 52-week low of RM16.54 this morning. The share price has slumped 42% since our downgrade from Add to Hold on 6 May.
We have confirmed with PetDag’s management that the automatic pricing mechanism (APM) is intact and that the company will continue to collect a fixed company margin of 5 sen/litre for RON95. More importantly, the managed float system will result in the absence of subsidy receivables, thus potentially improving the company’s cash flow. Previously, subsidy payments from the government to PetDag took an average of two to three months.
Given the fall in the global oil prices, the gap between the retail and market prices has narrowed. Based on our calculations, the market price for RON95 as at 19 Nov stood at RM2.17/litre (Figure 1) while the market price average for the month up until 19 Nov was RM2.20/litre, 4% below the retail price.
What You Should Do
Take advantage of the sharp share price correction and accumulate PetDag shares. The managed float system is positive for PetDag, which could see an improvement in cash flow while it continues to benefit from the APM.
Source: CIMB Daybreak - 25 November 2014
