PETRONAS DAGANGAN BERHAD - 2019

MARC has affirmed its MARC-1_IS /AAA_IS ratings on PETRONAS Dagangan Berhad’s (PDB) Islamic Commercial Papers (ICP) and Islamic Medium-Term Notes (IMTN) Programme of up to RM2.0 billion with a stable outlook. There is currently no outstanding amount under the rated programme.

The ratings reflect PDB’s strong financial metrics, characterised by its strong liquidity and conservative capital structure. PDB’s ratings also consider the high level of parental support from Petroliam Nasional Berhad (PETRONAS), on which MARC maintains public information ratings of AAA/MARC-1/stable. The stable outlook on the ratings reflects MARC’s expectation that PDB will continue to maintain its current credit profile and level of parental support.

PDB is the leading domestic player of downstream petroleum products, benefitting from an extensive network of more than 1,000 petrol stations across the country. It has a strong market position which is underpinned by the well-established PETRONAS brand. PDB’s businesses are divided into four core segments: retail (mainly motor vehicle gasoline and diesel), commercial (mainly airline fuel), liquefied petroleum gas (LPG) and lubricants. PDB has continued to improve its services by upgrading convenience stores and launching new fuel products, amongst others. PDB also added eight new petrol stations in 2019 in order to expand its market reach.

In 2019, PDB’s total group revenue increased by 0.7% y-o-y to RM30.3 billion (2018: RM30.1 billion) on the back of a 5% growth in sales volume contributed by the retail and commercial segments, which was moderated by a 4% decrease in average sale prices. Pre-tax profit, however, declined by 4.1% y-o-y to RM1,128.9 million (2018: RM1,177.0 million) as a result of higher operating expenses during the period. Operating profit margin declined accordingly to 3.8% from 3.9% in 2018.

Cash flow from operations (CFO) improved significantly to RM2,408.6 million in 2019 (2018: RM81.8 million). This was mainly due to the receipt of a large subsidy payment from the government and timing difference on payments to suppliers. Better CFO stability is expected should the targeted fuel subsidy scheme be implemented, as selling prices will be set at market prices. This contrasts with the current system whereby a proportion of earnings are paid in the form of subsidy receivables from the government if market prices exceed the selling price cap.

In 2019, PDB’s free cash flow (FCF) improved to RM1,280.6 million in 2019 (2018: negative RM1,201.7 million) due to a special dividend which was paid out in 2018. Capex increased to RM460.1 million (2018: RM374.9 million), which was used for petrol station upgrades, existing IT system improvements and the introduction of new digitalisation initiatives. Capex continued to be funded by internal capital, resulting in a low debt-to-equity (DE) ratio of 0.06x. PDB’s conservative capital structure provides enough headroom should additional borrowings be required in the future.

Major Rating Factors

Strengths

• Strong parental linkage to PETRONAS;
• Well-established business profile with strong market position;
• Strong operating track record; and
• Sound debt protection metrics.

Challenge/Risk

• Competitive commercial segment.