Stock slump surprise for Petronas Dagangan

by **Cals** Mon 04 Aug 2014, 02:01

Published: Saturday August 2, 2014 MYT 12:00:00 AM
Updated: Sunday August 3, 2014 MYT 11:46:13 AM
[size=40]Stock slump surprise for Petronas Dagangan
BY INTAN FARHANA ZAINUL[/size]
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Mohd Ibrahimnuddin: ‘It is a very challenging year for us, and the market is going to continue to be challenging for the next few quarters.’
IT is almost the talk of the stock market. Puzzled investors are wondering why the share price of Petronas Dagangan Bhd (PetDag) has been heading south since April to a two-year low at RM18.96 on yesterday’s close.
It was among the worst performers on the local bourse, plunging close to 40% from its peak of RM31.82 on Dec 30. At its closing price of RM18.96 yesterday, the stock is down 38.8% year to date, with a market capitalisation of RM18.836bil.
What triggered the sell-down was weak first-quarter earnings, and even PetDag’s second largest shareholder Employees Provident Fund (EPF) was also selling.
EPF has been trimming its stake in PetDag from 60.1 million shares in April to 51.66 million shares as of July 30. Following its steady and relentless selling, EPF is now left with a 5.2% stake in PetDag.

Apart from the drop caused by a weak set of financial results, analysts say what excerbated the selling could be the stock’s not so exciting dividend yields. The market was willing to look the other way on the stock’s dividend yields when growth was strong but maybe it could not stomach such high valuations when earnings started to wane.
“It is an overreaction over PetDag’s first quarter results but investors are concerned over the company’s continuous earnings compression,” an analyst says.
Several research houses issued “sell” calls on the stock as the margins remain depressed due to excalating operating costs and volatility in oil prices.
In the first quarter ended March 31, 2014, PetDag reported a 34.6% drop in its net profit to RM155.1mil from RM237.1mil from the same quarter last year due to higher operating costs and higher product costs.
The group also declared a lower dividend of 12 sen from 17.5 sen a year ago.
PetDag’s newly appointed managing director and chief executive officer Mohd Ibrahimnuddin Mohd Yunus says that while the firm is concerned about the decline it its stock price, the group is more concerned and focused on ensuring long term sustainable growth.
“It is a very challenging year for us, and the market is going to continue to be challenging for the next few quarters.
“Consumers are becoming more sensitive towards what you are offering..as the cost goes up, they are becoming more careful, therefore we have to make sure that we give the best to our customers,” he tells StarBizWeek in an interview.
Ibrahimnuddin joined PetDag in February. He has been a career Petroliam Nasional Bhd (Petronas) employee and has worked in various departments.
“We will continue our efforts in optimising our cost and at the same time continue to strengthen our supply and distribution network, as well as provide differentiated products,” he notes.
Looking ahead
As the largest petrol station owner in the country, Petronas Dagangan Bhd is on the verge of taking over Shell’s pole position as the market leader in the local retail business over the next four to five years.
Last year, the company opened 42 stations nationwide, and it is aiming to open between 30 and 40 more petrol stations this year to a total of 1,121 stations nationwide. PetDag has a domestic market share of about 31% in terms of sales volume.
Shell Malaysia Trading Sdn Bhd owns more than 900 petrol stations nationwide and has a market share of about 36%.
The retail arm of national oil company Petronas has been consistently allocating a staggering RM500mil in capital expenditure annually for the past 10 years and is not showing any signs of slowing down its effort to lead the retail market.
Analysts are betting that the group could achieve its goal to be the market leader sooner than expected.
“PetDag is laying the foundation for future growth and keeps its focus on becoming an all-around domestic leader in two years,” says CIMB Research analyst Norziana Mohd Inon in a report.
It’s currently trading at price-earning (p/e) ratio of 25.5 times compared to 38.48 times last year. On a forward p/e ratio, the stock is trading at 22.08 times.
RHB Research Institute says Shell has been expanding at the rate of 20 to 30 stations per year.
“This implies a relatively less aggressive appetite versus PetDag’s 40 to 50 stations per year.
“It remains to be seen if PetDag can eventually dethrone Shell’s leading position in the retail market,” it says in a note to clients.
In 2013, Petdag’s retail business recorded 3.8% increase in sales volume to 1,8101 million litres. The retail business currently contributes close 60% of the company’s overall margin and 45% of its revenue.
On top of its network expansion, Ibrahimnuddin explains that the company has been embarking on the plan to “sweat” its current 1,081 stations and terminals under operation to unleash the best possible value in its stations.
“We want to increase the sales volume in our existing stations and we need to put a lot of interventions in the stations. For example, adding more offers, upgrading facilities such as lowering the time needed to refill your fuel tank as well as providing differentiated products,” Ibrahimnuddin says.
PetDag has set up 725 Kedai Mesra to compliment its petrol stations as well as having quick-service restaurants such as KFC, McDonalds, Dunkin’ Donut, and most recently Starbucks Coffee.
It also recently launched a new fuel product, Petronas Primax 95 with Advanced Energy Formula, which has been developed based on Formula One (F1) technology.
“We have Mercedes AMG Petronas F1 Team driver Lewis Hamilton as our technical performance consultant to provide his feedback to help us develop this product,” Ibrahimnuddin says.
He says the group is optimistic about sustaining its market leadership in the company commercial business, especially with the opening of KLIA2.
Its commercial business has a portfolio of petroleum products such as diesel, aviation fuel, fuel oil and bitumen. The commercial business contributes 55% of revenue.
“We are still maintaining our sales volume.
“Nevertheless, there is still a lot potential in KLIA2 as there are opportunities for other airlines to come in, as well as the possible increase in number of aircraft from the existing airlines,” he says.
PetDag currently controls about 70% of Malaysia’s jet fuel market, with KLIA as its biggest customer.
Last year, the group recorded higher aviation volume of 5%, thanks to new supply contracts from Malindo Air, Air France and Turkish Airlines, says an analyst.
The group currently controls about 77.6% of Malaysia’s jet fuel market, with KLIA as main customer. There is a worry that sales of jet fuel could slow should Malaysian Airlines (MAS) cut some of its existing routes, but Ibrahimnuddin says it is not a big concern as other airlines may take over the routes.
The company provides fuelling services in most airports in Malaysia including KLIA and KLIA2 as well as in Heathrow London, Hong Kong and Denpasar, Batam and Pekan Baru in Indonesia.
He says the group would continue to expand its sales at international airports, depending on the demand to continuously support its customers. Moving forward, Ibrahimnuddin says that the company’s international foray would be the next phase of growth for PetDag.
The group entered the international market late-2012 and is currently engaged in the LPG business in Vietnam and the Philippines and, the lubricant business in Thailand.
“We are currently in the stage of nurturing our international subsidiaries. It is going to take time as we need to build the supply and distribution, ensuring everything is in place before we can really show substantial results,” he says.
The contribution from its international business is still marginal at about 5% of the group’s bottomline. It has allocated about RM200mil of capex to grow its overseas segment over the next three to five years.
While he is optimistic of the group’s potential to spur in its international venture, it will nonetheless remain challenging.
“These are unregulated markets, hence we need to make sure our cost is low to compete through supply and distribution to optimise our cost structure,” he says.