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Tuesday, April 17, 2018

CIMB Research upgrades Petronas Dagangan to Add

Tuesday, 17 Apr 20188:34 AM MYT

KUALA LUMPUR: CIMB Equities Research has upgraded Petronas Dagangan (PetDag) from Hold to Add and raised its dividend discount model-based target price to RM29.23.

The research house said on Tuesday the expected 1Q19F commissioning of Petronas’s Refinery and Petrochemical Integrated Development (RAPID) refinery will likely push up its volume growth and market share, especially in the commercial space.

“Petronas is evaluating strategic moves to export refined product volumes from RAPID that are in excess of domestic demand; this may involve PetDag, in our view,” it pointed out.

It said RAPID would push PetDag’s volume growth higher from FY19F onwards. Potential re-rating catalyst: rising market share once the RAPID refinery starts-up.

CIMB Research issued the report after it hosted PetDag on a two-day non-deal roadshow in Singapore last week, meeting 13 fund managers from nine companies.

Some investors said PetDag had been off their radar as they typically invested in growth stocks only, but that growth prospects for PetDag arising from Petronas’s new 300,000 bpd refinery at RAPID had piqued their interest.

Colin Wong, CEO of Petronas Refinery and Petrochemical Corp, had said that from the expected 1Q19F commissioning, the refinery will produce 220,000 bpd of products, with Euro 5-compliant motor gasoline (mogas) and diesel each at 90,000 bpd, with 40,000 bpd of other products like jet fuel, etc.

This is on top of Petronas’s existing Kertih and Melaka refineries, as well as the Hengyuan and Petron refineries in Port Dickson.

As RAPID's output is in excess of domestic demand, half of it will ultimately be exported.

“We expect PetDag to get ample access to RAPID's product output, and use it to penetrate more deeply into the commercial market.

“For instance, PetDag is looking to increase its already-large 60%+ market share in jet fuel sales from FY19F onwards by partially displacing Shell and Petron.

“There are opportunities to raise market share in the retail market too, with PetDag using the available RAPID mogas output to open more stations, and engage in more promotional activities,” it said.

For Malaysia as a whole, around 30% of existing domestic diesel production is already being exported, according to PetDag, hence virtually all of RAPID’s diesel output will likely be exported.

However, Malaysia is probably a net importer of mogas and jet fuel, hence part of RAPID’s output of these two products will likely be consumed domestically, with the rest to be exported.

Petronas can either export the products to global oil traders or users on wholesale pricing, or sell the products to the overseas retail market, in our view.

The latter option means that Petronas can capture a greater part of the value chain, since retail pricing is typically higher than wholesale pricing.

However, it will also need to build or invest in overseas retail distribution, which may involve PetDag if Petronas decides to go down this route.

“Given the scarcity of such assets, a deal is likely to be expensive and Petronas will have to carefully evaluate its options.

“The liberalisation of retail prices is a possible risk to the industry. However, we believe that this is unlikely, given that rural prices would rise (only urban prices would fall) and this would be deeply unpopular with the people, and that the oligopolistic petroleum retail industry in Malaysia suggests that the incentive to ‘rock the boat’ will be limited.

“The longer-term risk of electric cars was also discussed, but the fund managers we met were more interested in the positive medium-term drivers for PetDag arising from RAPID,” it said.


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