Friday 02 Jun 2023
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This article first appeared in The Edge Malaysia Weekly on March 6, 2023 - March 12, 2023

THE rise of electrification has marked a shift in the operating landscape for fuel retailers, who for decades have enjoyed an oligopoly with no competition in the automotive sector.

With electric vehicles (EVs) in the picture, small charge point operators (CPOs) and industry giants — Tesla, too, is entering Malaysia with its own fast-charging network — are pulling away from the once-inelastic market. This is on top of home-charging, which bypasses retailers completely.

In response, some companies are taking a more aggressive approach. Shell plc adopts a global strategy to sell electricity as the new fuel — at both the pumps and commercial areas as it aims to more than triple its charge points globally to half a million by 2025, from 140,000 now.

National oil firm Petroliam Nasional Bhd (Petronas), too, is supercharging its EV charging venture with more than 150 chargers so far in Malaysia and counting, as well as in India, where EV adoption has accelerated.

Interestingly, the venture is being spearheaded by Petronas’ new energy solutions entity Gentari, not its listed unit Petronas Dagangan Bhd (PetDag) — the biggest fuel retailer in Malaysia, with more than 1,000 petrol stations. Of these, 21 stations have DC (direct current) fast chargers on-site and more than 60 stations have EV chargers.

PetDag CEO and managing director Azrul Osman Rani foresees, however, that the EV hype poses little threat to its petrol business for the next 10 years at least, simply because of the high number of petrol-fuelled cars sold over the past two years in the country.

Furthermore, Azrul, who took over the reins at PetDag on Jan 1, 2020, understands the role that the company will play and the risks in riding the growth potential that the EV transition could bring.

“Typically, when you see a new vehicle being put on the road, it will stay within the economy for at least 10 to 15 years,” he says.

“It’s not going to be as fast as some people think, but there are many schools of thought here and I could be completely wrong.”

Nonetheless, he believes PetDag does not have the luxury of resting on its laurels.

On Level 75 of Tower 1 of the Petronas Twin Towers, Azrul tells The Edge that his duty is to “help steer the longer-term vision of the organisation in terms of the diversification of our future revenue away from fuel”.

Instead of being aggressive in the EV charging space, he says, PetDag should be playing a supporting role in Petronas’ overall group strategy on EVs.

Azrul believes PetDag’s core business is to provide convenience to motorists. As such, he is seeking partners to test a potential battery swapping service for EV customers at its petrol stations, among others.

In the evolving landscape, PetDag will continue to explore the area of customer convenience, which it has been looking to go into for a long time.

“Clearly, we ought to be a significant player in the Malaysian market space in the larger [vehicle] ecosystem … but we also need to be wary about the pace of scale,” Azrul says.

“If you’re too ahead of the curve, that also may pose a bit of a challenge in terms of [having to replace the existing] technology,” he adds, referring to EV technology.

He says investment will be needed to prepare a site for charging ports, and the allocation of space for charging ports at Petronas stations will also mean taking away opportunities for other business expansion.

The reality is that fuel stations are better suited for transient charging, where demand is very low compared with commercial area charging.

Pointing to sales of new combustion vehicles of between 600,000 and 700,000 a year in recent years, Azrul sees the business of selling petrol as still viable in this decade.

“It will take a lot longer than 2030 … There’s time to react [to tweak the business model]. But we don’t take our revenues for granted.”

Big push for non-fuel retail

PetDag has long been consistent in its plan to grow its non-fuel segment by tapping its retail segment, starting with upgrading its petrol stations to include convenience store Kedai Mesra and restaurants and now Café Mesra. At present, PetDag has more than 1,000 Petronas stations and about 800 Kedai Mesra nationwide.

To broaden its revenue base, PetDag is offering non-fuel-related consumer services at its petrol stations by offering affordable food and beverage, for example, at its Café Mesra. It has opened 41 Café Mesra in less than six months.

In addition, PetDag is looking to sweat its current petrol stations to generate higher sales per square foot.

Instead of building more petrol stations, PetDag is setting up Café Mesra branches in post offices.  The company is also adding more services — such as courier services, vehicle insurance, cooking oil recycling services, auto assistance, and payments to merchants and stores at the North-South Expressway rest and service areas — to its mobile application (app), Setel. This is a way for the group to serve its customers even when they are not at petrol stations.

Still, its non-fuel segment contributed less than 1.38%, or RM16.12 million, of its operating profit after tax for the financial year ended Dec 31, 2022 (FY2022).

Indeed, the expansion of its non-fuel business is eating into its bottom line. The non-fuel segment, known as the “convenience” segment, saw a 60% decline in profit before tax in FY2022 to RM15.7 million, from RM39.4 million in FY2021, owing to higher operating costs from business expansion.

For now, the meat remains in PetDag’s commercial and fuel retail businesses, which typically provide 40% each to the group’s financial performance. Another 15% typically comes from the liquefied petroleum gas (LPG) business.

The earnings figures raise scepticism, however, about PetDag’s strategy to grow its non-fuel business. Furthermore, the areas that it is venturing into are highly competitive, with low barriers to entry.

Precisely because of that, Azrul is adopting the strategy of casting a net for viable non-fuel businesses.

“The reality is, we will try a lot. I think that there is also an understanding [from the board] that there will be some that work and some that will not,” he says.

“This is very much in line with Petronas’ cultural belief, which includes innovation and having the courage to act.”

He adds that PetDag has processes and guardrails to test things on a smaller scale before deciding whether to scale up.

“We understand it’s a journey, but we need to be single-minded in our purpose, and a key area is expanding our retail business.

“The business that we have today and the ability to enjoy success in both commercial and retail was on the back of decades of investment,” he says.

Azrul is optimistic that PetDag can grow its non-fuel segment to become an important revenue contributor, accounting for at least 30% by 2030.

While he is tight-lipped about the total capital expenditure that PetDag has earmarked for this year, the group’s annual allocation in the past has been to the tune of RM500 million.

Fuel sales to remain stable

For FY2022, the group’s net profit jumped nearly 47% year on year to RM776.6 million, from RM529.75 million, on the  back of a 62% y-o-y surge in revenue to RM36.7 billion, from RM22.7 billion.

The higher net profit was also contributed by a one-off gain of RM87.9 million from the divestment of its LPG business in Sarawak.

It paid out 76 sen annual dividend per share, or RM755 million in total, for FY2022, compared with 85 sen per share, or RM844.4 million, in FY2019.

Azrul points out that the FY2022 sales volume of its retail fuel was higher than pre-pandemic levels for two reasons: one, more vehicles on the road; and, two, volumes that potentially leaked into the commercial segment because of a wide gap between commercial diesel and subsidised retail diesel prices last year.

He believes there is unlikely to be a big jump in sales volume, although he is optimistic of some support from higher demand for jet fuel sales.

“FY2022 sales volume was the highest in PetDag’s history. So, basically, we just say that 2023 will be some kind of lower consumption or consolidation.

“If you look at the macroeconomic level … obviously, an acceleration of targeted subsidy could reduce volume.”

Azrul adds that while fuel consumption is “relatively inelastic” because fuel is a necessity, rising interest rates would have an impact on demand, as people have less disposable income.

Put bluntly, it is apparent that Azrul might face a more challenging task ahead than his predecessors did as an alternative fuel for vehicles — electricity — emerges, in addition to the headwinds caused by the economic climate. He has to deal with disruptions in the industry.


Expectations of higher dividend as receivables woes are settled

One positive note for Petronas Dagangan Bhd (PetDag) is that it has seen its receivables reduced to RM4.02 billion at end-December FY2022, from a whopping RM13.88 billion at end-September FY2022, after full receipt of fuel subsidy receivables by the government.

PetDag noted in its recent FY2022 results announcement that liquidity had improved, following “full receipts of subsidy receivables in the quarter”.

The significant jump in FY2022 receivables came as oil prices rose to an average of US$102 a barrel in 2022 from US$57 previously. This caused subsidies related to petrol, diesel and liquefied petroleum gas (LPG) to rise nearly fivefold to RM50.8 billion in FY2022, from RM11.1 billion in FY2021, at a time when the government had paused its repayment process.

The subsidy repayment was “significant”, PetDag managing director and CEO Azrul Osman Rani says, but he stresses that it was not a major concern for the group.

The payment was done along with its industry peers, he says.

“We understood the timing and planning that was required at that particular juncture. From our lens, the subsidy receivables came on time, based on the discussions with the government … I think [the government] just had some bridging at that point in time,” Azrul explains.

In normal circumstances, he says, the government repays any subsidy amount due within a month.

“The risk [of bloated receivables due to unpaid petrol subsidy] is quite minimal. Moving forward, I think there is a better understanding … What we can’t afford is for organisations like ourselves and our peers to have any interruptions,” he adds.

Some investment analysts point out that the full receipt of subsidy receivables by the government has substantially improved PetDag’s liquidity, as evidenced by the stronger operating cash flow of RM2.3 billion in the fourth quarter of FY2022.

CGS-CIMB Research says PetDag ended FY2022 with a healthy cash balance of RM2.91 a share and debt amounting to only 19 sen a share since subsidy receivables due from the government have been fully settled.

The research house, which has a “reduce” call on the stock, points out, however, that PetDag can afford to be more generous with dividend payouts.

“With only minimal capital expenditure in the past several years, and likely low capex going forward, we are unsure why PetDag has not been more generous with its dividends,” CGS-CIMB Research says in a report.

“PetDag’s low FY2022 dividend per share of just 76 sen (97% payout) suggests that our target price may be too high unless PetDag becomes more generous with its dividends in the future,” it says.

In this matter, Azrul explains the need to strike a fine balance between rewarding shareholders and investing for future growth.

“So, it will continuously be a balance of how much we want to put in and also ensuring that our investors will have an expectation of healthy dividends,” he says.

Hong Leong Investment Bank Investment Research (HLIB Research) reckons that PetDag will continue to benefit from the reopening theme and economic recovery with the easing of restrictions on international travel.

HLIB, which has a “sell” call on the stock, says, however, that the current valuation of PetDag looks too high, based on its fundamentals.

“The risk-to-reward ratio is not justified, as valuations are rich at forward price-earnings multiples of close to 30 times,” it says in a report.

The research house has a “sell” call on the counter, with a target price of RM19.12. CGS-CIMB’s “reduce” call on PetDag comes with a target price of RM19.34.

There is a relatively large gap between the highest and lowest target prices among analysts tracked by Bloomberg. TA Securities has its target price pegged at RM26.70 whereas MacQuarie’s fair value is at RM16.

PetDag’s share price has been on an upward trend since November 2020, climbing from a low in the RM16 range then to a high of RM23.56 at end-November last year.

The stock retreated from the peak to RM20.86 last Friday, giving it a market capitalisation of RM20.96 billion.

Given the changing operating landscape and the tweaking of the petrol station operator’s business model, it would be interesting to see how analysts value PetDag in the future.


Petrol subsidy cut a wild card for PetDag

Petronas Dagangan Bhd’s (PetDag) petrol stations are likely to a channel through which the government will implement its targeted fuel subsidy, should the cut materialise.

Managing director and CEO Azrul Osman Rani says the group is working closely with the government on the implementation of the targeted subsidy mechanism for RON95 fuel, and expects it to come on stream in the next one to two years.

“It’s not just us (PetDag). Everyone in the industry has been consulted by the government with regards to its intention for implementation of the targeted subsidy.

“We have shared our views with the government in terms of our recommended implementation,” he tells The Edge.

Azrul reckons there are several methods that can be used, including digital solutions such as e-wallets, or through national identity cards (IC).

“Setel (Petronas’ payment app) could be one, and there could also be others. I don’t think it will be a single point of solution.

“Our stance is that we are fully supportive because the intent behind the government doing this has sound logic. The subsidy burden for the government is big and we are recovering as a nation from the Covid-19 pandemic,” he says.

It is worth noting that the government has already used the IC system for the My50 programme — a RM50 monthly pass for unlimited rides on public transport including the Rapid KL LRT, MRT, Monorail, BRT, Rapid KL bus and MRT feeder bus services in the Klang Valley.

Last year, the government embarked on a pilot project to test the targeted subsidy mechanism and a potential method for the deployment was indicated last week.

This was revealed by the newly appointed secretary-general of the Treasury Datuk Johan Mahmood Merican, who said that trials utilising e-wallets were already underway.

When asked if the government had communicated with PetDag on how much savings there could be with the targeted subsidies, Azrul says, “That depends very much on how the government wants to implement this. Because they have to consider who and what segment of the market they want to subsidise.”

At the moment, RON95 fuel is capped at RM2.05 per litre and diesel at RM2.15 per litre, while RON97 is RM3.35 per litre at market price.

It is estimated that without the government subsidies, RON95 could be priced at RM3.22 per litre, which is 57% or RM1.17 per litre more than the current price.

A back-of-the-envelope calculation shows that a person who spends about RM400 per month on fuel could be paying up to RM626 without subsidies, which is an extra RM228 per month.


Risk to sales volume

Analysts estimate that the targeted subsidies mechanism could pose a risk to the sales volume of fuel, especially for PetDag’s retail segment.

“In the next one to two years, the key derating catalyst for PetDag is any plan by the government to cut the fuel subsidy burden, which will likely cause pump prices to rise.

“We assume 5% retail volume growth in FY2023 forecast and 0% growth in FY2024 onwards, but these growth projections are at risk of future subsidy cuts,” CGS-CIMB Research says in a report.

Meanwhile, RHB Research expects that PetDag will continue to ride China’s reopening to boost its sales, but keeping in check the potential impact of the targeted fuel subsidy implementation on its retail arm.

“We expect commercial sales volume to pick up subsequent to China’s reopening and margins could normalise in the longer run.

“In the retail division, despite the strong sales volume recovery thus far, any slowdown in economic activities may affect the growth trajectory,” it says.


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