CREDIT ANALYSIS REPORT

Petronas Dagangan Bhd - 2013

Report ID 4631 Popularity 2477 views 97 downloads 
Report Date Oct 2013 Product  
Company / Issuer Petronas Dagangan Bhd Sector Infrastructure & Utilities - Oil & Gas
Price (RM)
Normal: RM500.00        
  Add to Cart
Rationale

MARC has assigned final ratings of MARC-1IS /AAAIS ratings to PETRONAS Dagangan Berhad’s (PDB) Islamic Commercial Papers and Islamic Medium Term Notes (ICP/IMTN) Programme of up to RM2.0 billion under the Islamic principle of Murabahah with a stable outlook. The ratings are equalised with MARC’s public information ratings on Petroliam Nasional Berhad’s (PETRONAS) AAA/MARC-1/Stable due to a strong parent/subsidiary relationship between the two companies which is evidenced by majority ownership of 69.9% as of August 30, 2013, brand sharing, parent influence in the management of PDB and the operational links arising from PDB’s role as a retailer and marketer of downstream petroleum products for PETRONAS. PDB’s ratings also incorporate its low business risk profile underpinned by its strong competitive position as the country’s leading retailer and marketer of downstream petroleum products for PETRONAS, its favourable liquidity and leverage metrics. PDB’s retail business segment benefits from a domestic regulatory environment which promotes stable margins and earnings predictability.

PDB markets a wide range of petroleum products, including gasoline, liquefied petroleum gas (LPG), jet fuel, kerosene, diesel, fuel oil, asphalt and lubricants. PDB’s operations are organised along four business segments: retail, commercial, LPG and lubricants. The retail and commercial segments respectively contributed 50% and 47% of consolidated pre-tax profit for reportable segments for the six-month period ended June 30, 2013 (1H2013). PDB has a long track record of operations in the domestic petroleum products market, with estimated market shares of 30% and 67% in term of sales in 1H2013 in its key retail and commercial segments respectively. PDB is currently the second largest player in the retail segment and a market leader in the commercial segment. The group’s LPG business is a leading domestic supplier of cooking gas cylinders while the market share of its lubricants segment remained stable at 24% in 1H2013 despite the competitive lubricants market.

PDB’s retail segment competes with other oil companies such as Royal Dutch Shell, Petron Malaysia and Caltex mainly for mogas (motor gasoline, i.e RON 95 and RON 97) sales. The segment’s well-recognised PETRONAS brand and the broad national footprint of its 1,010 operational petrol service stations as at end-June 2013 support its competitive standing. PDB’s retail segment saw higher sales volume in 1H2013 which resulted in a 7.2% increase in revenue compared to its performance in the six-month period ended June 30, 2012 (1H2012). PDB’s retail segment has demonstrated the ability to sustainably grow revenue and expand profitability despite less favourable economic conditions. This market segment in  general  remains  relatively  recession-resilient,  driven  by  factors  such as  the  relatively  low  price elasticity of demand for motor fuel and continued growth in the number of registered vehicles. The business risk profile of this segment also benefits from fuel pricing regulation, in particular fuel price subsidies.  The government regulates retail  prices  of  gasoline, diesel and LPG in Malaysia and  fixes the price of these products for end-buyers via an Automatic Pricing Mechanism (APM) which accords the company a fixed margin per unit of fuel sold. Any fluctuations of oil prices are absorbed by the government via adjustments to the fuel subsidy, mitigating the impact of oil price fluctuations on the segment’s financial performance. Fuel supply risk, meanwhile, is mitigated with around 75% of PDB’s mogas and diesel supplies requirements sourced from PETRONAS’ refining operations and the balance from PETRONAS’ international trading subsidiary and third parties.

PDB’s market leadership position in the commercial segment, which has diesel, aviation fuel, fuel oil and asphalt among its major product lines, is derived from its long business relationship with large companies in the industrial, governmental, fisheries, transportation, power and aviation segments as well as its extensive supply, distribution and logistics system throughout the country. The segment saw a drop in the sales volume of diesel in 2012, the impact of which was largely offset by higher revenue contribution from aviation fuel sales. Aviation fuel sales remained a key driver for revenue growth in the commercial segment during 1H2013.
 
As at end-December 2012, PDB completed the acquisition of six PETRONAS subsidiaries involved in the lubricants and LPG marketing segments in Philippines, Thailand and Vietnam. Notwithstanding the growth potential and diversification benefits afforded by PDB’s regional expansion, PDB’s entry into markets with a higher country risk profile than Malaysia introduces new risks which could meaningfully alter its business risk profile going forward. However, in the near to intermediate term, the earnings contribution from new overseas ventures are expected to remain modest, below 2% until 2015.

PDB’s financial profile is characterised by its fairly stable earnings and cash flow generating profile, low debt leverage and moderate capital expenditure requirements. Consolidated revenue for the financial year ended December 2012 (FY2012) increased by RM864.5 million to RM29.5 billion, from the results of the corresponding 12-month period. The increase was attributed to increases in both average selling prices and sales volume. Consolidated profit before tax was RM49.3 million lower from FYE2011 at RM1,165.2 million, due to a decline in fuel margins and increased operating expenses which was partly offset by a RM43.3 million increase in other income. During 1H2013, PDB’s revenue increased by 8.4% to RM15.5 billion (1H2012: RM14.3 billion) driven by higher overall sales volume. This resulted in a 4.5% increase in pre-tax profits during the period (1H2013: RM600 million; 1H2012: RM573 million).

With the exception of the nine-month period ending December 2011 (PE2011), PDB’s cash flow from operation (CFO) has been strong and sufficient to cover its capex requirements and financing obligations. Capital expenditure typically represents about 30% to 50% of CFO per annum. In PE2011, PDB registered negative CFO due to a mismatch in timing of receipt of subsidies from the government in relation to sales of subsidised retail products. PDB reverted to positive CFO in FY2012 (FY2012: RM1.86 billion; PE2011: RM643.97 million deficit) on account of the normalisation of its receivables level during the financial year with free cash flow of RM604.6 million and cash and cash equivalents of RM251.3 million. PDB posted a CFO of RM1.35 billion for 1H2013 (1H2012: RM2.03 billion). Prior to PE2011, PDB funded its business operations and expansion almost entirely through internally generated funds. Proceeds from the proposed sukuk issuance will be applied towards PDB’s working capital requirements to fund its capex and/or general corporate purposes which are Shariah-compliant. Given PDB’s very modest levels of debt at present, MARC believes that the increase in its financial leverage will remain well within the rating agency’s tolerance level for PDB’s current rating.

The stable outlook reflects MARC’s expectation that PDB’s business and financial fundamentals will continue to remain solid.

Major Rating Factors

Strengths

  • Established operating track record and resilient business profile;
  • Strong operational integration with parent; and
  • Strong debt protection metrics.

Challenges/Risk

  • Volatile and low margins of commercial segment; and
  • Managing the risks inherent in its growth strategy.
Related