PETRONAS Dagangan Bhd - 2014

MARC has affirmed its ratings of MARC-1IS  /AAAIS on PETRONAS Dagangan Berhad’s (PDB) Islamic Commercial Papers and Islamic Medium-Term Notes (ICP/IMTN) Programme of up to RM2.0 billion. The outlook on the rating is stable. The affirmed ratings are equalised to the AAA/MARC-1/Stable ratings of PDB’s parent, Petroliam Nasional Berhad (PETRONAS) based on available public information. MARC’s approach is premised on the strong parent-subsidiary relationship between PETRONAS and PDB as is evident in the strong operational linkages between both entities and shared branding, among other factors. PDB is effectively the marketing arm of PETRONAS’s domestic downstream petroleum products segment in which the company has a leading domestic position. The ratings also incorporate PDB’s strong financial profile, underpinned by its sound liquidity and favourable leverage position.

PDB distributes petroleum products such as motor gasoline (mogas) and diesel (retail segment); aviation fuel and bitumen (commercial segment); cooking gas (LPG segment); and lubricants for all classes of vehicles as well as industrial and marine usage (lubricant segment). PDB maintains market leadership in the domestic commercial and LPG segments with an estimated market share of 68.2% and 57.2% respectively in 2013. The retailer is also the second largest-player in the retail and lubricant segments domestically. PDB’s strong competitive advantage in the retail segment is undergirded by the highly recognisable “PETRONAS” brand as well as an extensive distribution and logistics network of more than 1,000 stations as at end-September 2014, the largest in the country.

PDB’s retail segment benefits from the Automatic Pricing Mechanism through which the company’s margin is fixed. This provides some degree of earnings stability to the retail segment, moderating the more volatile earnings of the commercial segment whose performance, in particular that of aviation fuel sales, is susceptible to oil price movements and economic cycles. The APM structure will remain intact when the managed float mechanism on RON95 and diesel is implemented from December 1, 2014. MARC observes that the commercial and retail segments continue to account for the bulk of PDB’s revenue, accounting for 49.2% and 44.2% of total revenue of RM24.9 billion in the first three quarters of 2014 (3Q2014) (3Q2013: RM24.0 billion).

PDB’s financial performance continued to exhibit a stable but low margin profile, supported by a low fixed cost structure and high sales volume. For 2013, revenue increased by 9.6% year-on-year to RM32.3 billion in 2013 following an improvement in sales volume by 8.5%; however, the pre-tax profit declined marginally to RM1,109 million (2012: RM1,165 million) due to weaker operating margins in both the retail and  commercial  segments as  well  as  higher advertising  and  promotion  expenses  incurred  for  branding initiatives. For 3Q2014, revenue increased by 3.9% year-on-year to RM24.9 billion following higher average selling prices in both the retail and commercial segments. However, pre-tax profit declined to RM697.6 million (3Q2013: RM915.7 million) on margin compression on the retail segment. The retail segment registered lower gross margin as a result of higher product cost due to unfavourable timing differences of Mean of Platts Singapore (MOPS) prices compared to the corresponding period last year. In respect of the commercial segment, revenue declined by 1.4% y-o-y in 3Q2014 on lower sales volume of 5% compared to the previous corresponding period.

In 3Q2014, PDB’s cash flow from operations (CFO) continued to be resilient, albeit declining to RM636.3 million (3Q2013: RM2,181.6 million) on lower profitability and higher working capital requirements. The CFO remained adequate to cover capital expenditure requirements and debt payment obligations. The company’s liquidity was supported by a drawdown of IMTN of RM300 million. MARC views PDB’s cash flows, in the near term, to benefit from the release of working capital tied to the outstanding subsidy receivables from the government, in line with the fuel subsidy rationalisation.

The stable outlook on the ratings reflects MARC’s expectation that parental support from PETRONAS towards PDB will remain intact and, and at the same time, the group will maintain a credit profile that is consistent with the ratings. 

Major Rating Factors

Strengths

• Well-established operating track record and resilient business profile;
• Strong operational integration with parent PETRONAS; and
• Strong debt protection metrics.

Challenges/Risk

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