MARC Ratings has assigned preliminary ratings of MARC-1_IS/AAA_IS to PETRONAS Dagangan Berhad’s (PDB) Islamic Commercial Papers (ICP) Programme and Islamic Medium-Term Notes (IMTN) Programme with a combined limit of up to RM10.0 billion in nominal value. The ratings outlook is stable. 

PDB’s well-established domestic track record in the retailing and marketing of petroleum products and its very strong market position are key rating drivers. The ratings also incorporate PDB’s healthy balance sheet structure, characterised by strong liquidity and a conservative capital position. PDB’s credit profile also benefits from its strategic importance to the Petroliam Nasional Berhad (PETRONAS, AAA/Stable) group, being the retail and marketing arm of PETRONAS for downstream petroleum products.

In the retail segment, PDB has an extensive distribution network of more than 1,000 petrol stations in the country, and expects to add 10-15 petrol stations p.a. nationwide to maintain its strong position in the market. In the commercial segment ¬— mainly aviation fuel¬ — the group’s longstanding relationships with major local carriers and strong supply capabilities have contributed to recurrent contract orders. The near-term outlook for the commercial segment, which was disproportionately impacted by the closure of international travel during the pandemic, is improving on the back of the upward trend in domestic economic activity and the gradual resumption of international and domestic travel.

MARC Ratings notes PDB’s well-integrated operations stem from its interlinked relationships with other companies within the PETRONAS group; its fuel supply, for instance, is procured from PETRONAS’ indirectly wholly-owned subsidiary PETCO Trading Labuan Company Ltd (PETCO), thereby ensuring reliability. 

PDB’s profitability is characterised by thin operating profit margins of below 5% over the last five years; about 2% margin was recorded during the height of the pandemic in 2020. In the retail segment, pricing is determined by the automatic pricing mechanism (APM), which is based on Mean of Platts Singapore (MOPS) and incorporates operating cost and a fixed profit for PDB. This mechanism helps offset fluctuating margins from the commercial segment, which is subject to open market price volatility. 

For 2022, group revenue rose by 62% y-o-y to RM36.7 billion, driven by higher average selling prices and sales volume across both core segments following full resumption of economic activities. Accordingly, pre-tax profit rose by 53% y-o-y to RM1.1 billion. Recorded movements in cash flow from operations (CFO) reflect mismatches in timing between payments for fuel purchases, and receipt of subsidies from the government for the sale of subsidised fuels. 

The group may utilise proceeds from the programmes — ranging from RM3.0 billion to RM5.0 billion over the next five years — to meet short-term funding requirements. Capital commitments are relatively moderate at around RM450.0 million p.a, and have been mainly allocated towards retail station expansions as well as non-fuel diversification (through the launch of Café Mesra outlets at its retail stations). 

Total borrowings of RM184.3 million as at end-2022 remain modest relative to its capital structure. Gross debt-to-equity (DE) ratio stood at 0.03x, with a net cash position. Liquidity position remains healthy with cash and cash equivalents of RM2.9 billion as at end-2022. Going forward, we expect the group to maintain a conservative capital structure. 

The stable outlook reflects our expectation that PDB will broadly maintain its credit metrics over the next 12 to 18 months that is commensurate with its rating band.

The rating could come under pressure should PDB’s business and financial metrics deteriorate significantly below the current rating band and/or there are significant changes in the PETRONAS group’s direction and strategy from our expectations that impact PDB’s business and financial performance.