7 Things You Need To Know About PETRONAS Dagangan Berhad Before Investing

For every car owner in Malaysia, you should have most likely driven past or refilled in one of the PETRONAS pumping station. Although my family has always been more of a Shell customer, I have been warming up to PETRONAS service stations in recent years.

While many of us might view these service stations as part of the empire of PETRONAS, the national oil and gas producer of Malaysia, that is only part of the story. In fact, all these PETRONAS service stations and other retail business of the PETRONAS Group is directly under the management of PETRONAS Dagangan Berhad (KLSE:PETDAG) (PETDAG 24.14 -0.02 -0.08%). PETRONAS does own a majority stake in PETRONAS Dagangan Bhd, with a 69.9% stake in the company. But interestingly, we can actually invest in PETRONAS Dagangan as it is a listed company on Bursa Malaysia.

In fact, the company has been a great investment for long-term shareholders. Its share price has rallied from just RM3.86 per share in 2005 to the current RM24.30 per share (May 2017). That is about a 16% return per annum for the past twelve years (excluding its dividend!). On top of that, the company has been an active and generous dividend payer throughout the past decade.

With such a strong track record, PETRONAS Dagangan Bhd is definitely worth a look for any serious investor. However, the company is already the market leader in many of the segments it is operating in. So, is there still room to grow for PETRONAS Dagangan?

Here are the top 7 things that an investor need to know about the company.

Stock Information
1
TICKER SYMBOL: KLSE:PETDAG | 5681.KL

MARKET CAP: RM 24.1 Billion (Updated 29th May 2017)

INDUSTRY: Energy

The Business

PETRONAS Dagangan can be seen as handling the downstream business of the PETRONAS Group. It generated about RM21.8 billion of revenue in 2016 and produced a net profit of RM915 million. The company groups its business into two main segments; retail and commercial operations.

Retail

Its retail operations consist of its large network of service stations across Malaysia. Within them, the company offers services and products like fuels, convenience stores, loyalty and credit cards. Apart from that, PETRONAS Dagangan is also the largest distributor of cooking gas and LNG products in Malaysia. Lastly, retail business includes its wide range of lubricants oil for motor vehicles and industrial usage.

Its retail segment contributed about 45% of its overall revenue but 56% of its operating profits in 2016.

Commercial

Its commercial operations could be described as all remaining products and services that are sold to commercial and industrial customers. This includes its aviation fuel and marine diesel business, which PETRONAS Dagangan is one of the key players in this sector.

This segment contributed about 55% to the overall revenue but just 44% of the operating profits in 2016.

Key Opportunities

Aviation Boom In Malaysia

One key opportunity that is lying ahead for PETRONAS Dagangan is the fast-growing aviation industry. The entire aviation industry is growing in Southeast Asia and Malaysia has also experienced significant growth over the past decade.

In 2016, the Malaysia aviation market grew by 7% and is expected to grow as much as 11% in 2017. With the largest low-cost carriers, such as AirAsia Bhd (AIRASIA 3.18 +0.01 +0.32%), AirAsia X Bhd (AAX 0.41 0.00 0.00%)and Lion Group affiliate, Malindo Air, all in the Malaysia market, the aviation industry is one high-growth market in Malaysia.

Being one of the key air-fuel providers in Malaysia, PETRONAS Dagangan can stand to benefit from the growing industry, regardless of which airline end up being the winner in this market.

Overseas Markets

Although most of the company’s revenue is still generated in Malaysia, PETRONAS Dagangan has been starting to expand into overseas markets. At the moment, the company has operations for its LNG and Lubricant businesses in markets such as Thailand and the Philippines.

Even though these markets are still relatively small and unproven for PETRONAS Dagangan, success in these markets can open whole new opportunities for the company in the future.

Expanding Offerings At Service Stations & Commercial Products

The company is testing out new designs and different offerings for its convenience stores. Moreover, it is also working with other partners to rent out some space within its service stations for drive-thru restaurants and cafes. These plans could improve the overall revenue and profitability of its retail business.

On the commercial end, PETRONAS Dagangan is also expanding its product range by adding new products such as Bitumen, Petroleum Coke and Sulphur into its portfolio. All these new products could potentially open new markets for the company.

Key Risks

Declining Car Sales In Malaysia And The Future of Car Ownership

However, there are some direct threats and risks for the company. For one, car sales in Malaysia have fallen sharply over the past few years. In 2016, car sales saw a 13% drop in volume compared to 2015. With the rising popularity of ride-hailing apps such as Grab and Uber in Malaysia, the efficiency of the usage of vehicles might improve, resulting in lower fuel usage throughout Malaysia.

In addition, massive public transport system such as the MRT in Klang Valley and the High-Speed Rail project might future reduce the usage of cars on Malaysia roads.

In the longer term, the transition to electric cars globally might put the entire service station business of PETRONAS Dagangan at risk in the next few decades.

Dependence On The Malaysia Economy

Lastly, as the company mainly selling commodity products for the Malaysia domestic market, it is highly dependent on the health of the Malaysia economy. This means that if the Malaysia economy weakens, the overall demand for PETRONAS Dagangan’s products might also be impacted directly.

Valuation

PETRONAS Dagangan is currently trading around 25.4 times its earnings and 4.5 times its tangible book value, giving it a market capitalization of about RM24.1 billion. The company is also offering a dividend yield of about 2.98%.

Its high P/E ratio might be reflective of its fast growth in its net profit over the past two years. Its net profit has increased by about 35% a year from RM501.6 million in FY2014 to RM913.1 million in FY2016.

However, that growth has come from declining revenue over the same period. In our opinion, that could bring the sustainability of that growth over the past two years into question.

Investor Relations

Nur Asyirin Ibrahim
Head of Investor Relations
Email: nurasyirin@petronas.com.my

Natalia Inani Norsalehe
Executive of Investor relations
Email: inani.norsalehe@petronas.com.my

Symphony Share Registrar Sdn bhd
Level 6, Symphony House
Pusat Dagangan Dana 1
Jalan PJU 1A/46
47301 Petaling Jaya, Selangor Darul Ehsan
Tel :(603) – 7849 0777
Email: ssr.helpdesk@symphony.com.my

Top Shareholders (31stDec 2016)

    1. PETRONAS Bhd – 69.86%
    2. Amanah Saham Bumiputera – 4.89%
    3. Employees Provident Fund Board – 3.69%

Financials

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned.

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Stanley Lim, CFA

Stanley Lim has spent the last decade in the investment industry. Over the course of his career, he has kick-started a few businesses, worked in the family office industry and most recently in the investment advisory industry. He has been a writer and analyst for The Motley Fool Singapore from 2013 to 2017. He has written close to 2000 articles online, on investment education and market analysis. He is the co-writer for the upcoming investment book: “Value Investing In Asia”, scheduled to be published late 2017. Stanley is currently the chief editor of Value Invest Asia.

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