Twin threats may weigh down PetDag’s prospects

PETALING JAYA: Petronas Dagangan Bhd’s (PetDag) medium-term prospects appear challenging in the face of a potential reduction in fuel subsidies.

In addition, the risk of rising competition if Saudi Aramco were to take over Shell’s network of fuel stations in Malaysia could also weigh down the outlook for PetDag.

Noting the high likelihood of the government reducing fuel subsidies from mid-2024, CGS International Research (CGSI Research) said such a cut could hurt PetDag’s sales volume.

“We think that higher pump prices could encourage carpooling and disincentivise the unlawful moving of subsidised fuel to foreign countries, which may ultimately reduce PetDag’s sales volume,” the brokerage said in a report.

CGSI Research was of the opinion that diesel subsidies might be restricted to hauliers and certain types of goods vehicles by way of a fleet card system and diesel pump price might rise from RM2.15 per litre to RM3.15 per litre if unsubsidised, while RON95 fuel price hikes might be phased in and ultimately rise from the current RM2.05 per litre to an unsubsidised price of around RM3.30 per litre.

On a positive note, a stronger-than-expected growth in jet fuel sales, as airline networks continue to recover, could be a cushion for PetDag, it said.

Separately, the research firm said the potential entry of Aramco could heighten competition and promotional activity in Malaysia. “If the Aramco-Shell deal happens, we think that Aramco will rebrand the stations and will probably offer promotions to retain existing customers and attract new ones,” it said, adding that the development could be negative for PetDag.

Reuters early this week reported that Aramco was negotiating with Shell to purchase the latter’s 950 retail fuel stations in Malaysia for about US$1bil. The deal could be finalised in the coming months.

The newswire noted that Shell was also working towards selling its Singapore refinery and petrochemical complex, which supplies to its Malaysian retail stations.

“While PetDag has more than 1,000 retail fuel stations in Malaysia, we think Shell’s 950 stations probably register higher sales because Shell had a first-mover advantage in building up the retail fuel station network in the country and had been very early in setting up multiple strategic locations in high-traffic areas. Shell also enjoys very strong brand recognition in Malaysia,” CGSI argued.

Citing the case of Petron Corp acquiring ExxonMobil’s Esso stations in Malaysia in 2012, CGSI Research noted that PetDag’s retail fuel sales fell 2% year-on-year (y-o-y) in 2014 and dropped another 9% y-o-y in 2015.

PetDag also incurred higher advertising and promotional costs to keep up with Petron Malaysia’s (PetronM) aggressive strategy, which included expanding its network from 550 stations in 2012 to 770 stations today, rebranding the stations and launching multiple promotional campaigns with loyalty points and prizes.

“Aramco could pursue a similar strategy as PetronM, in our opinion, which could be a potential de-rating catalyst for PetDag,” CGSI Research explained.