MARC has assigned MARC-1IS/AAAIS preliminary ratings to PETRONAS Dagangan Berhad’s (PDB) proposed issuance of up to RM2.0 billion Islamic Commercial Papers (ICP) and Islamic Medium Term Notes Programme (IMTN) (collectively Sukuk Murabahah Programme) 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%, brand sharing, parent influence in the management of PDB and the operational links arising from PDB’s role as the principal domestic marketing arm of PETRONAS for downstream oil and gas products. 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 as well as its favourable liquidity and leverage metrics. PDB’s retail business segment operates in a regulated environment which enhances the predictability of the group’s earnings profile.

PDB markets a wide range of petroleum products, including gasoline, 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 collectively contributed more than 90% of total revenue for the financial year ended December 31, 2012 (FY2012). PDB has a long track record of operations in the domestic petroleum products market, with estimated market shares of 31% and 65% in term of sales in 2012 in its key retail and commercial segments respectively. PDB is currently the second largest player in the retail segment and market leader in the commercial segment. The group’s LPG business is a leading domestic supplier of cooking gas cylinders while its lubricants segment made further gains in its market share to 27% despite the competitive lubricants market.

PDB’s retail segment competes with other oil companies such as Shell, Petron and Caltex mainly for mogas (motor gasoline, ie RON 95 and RON 97) sales. The segment’s well-recognised PETRONAS brand and the broad national footprint of its 1,027 petrol service stations supports its competitive standing. PDB’s retail segment saw higher sales volume in 2012 which stoked a 10% increase in revenue compared to its performance in 2011. 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 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 80% 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 commercial diesel, aviation fuel and asphalt among its major product lines, is derived from long business relationship with large companies such as Malaysia Airlines Systems, AirAsia and MISC, as well as its extensive supply, distribution and logistics system throughout the country. Similar to its retail segment, PDB’s commercial segment also competes for sales of fuel to industrial users and government agencies with multinational players. The segment saw a drop in the sales volume of fuel oil and diesel in 2012, the impact of which was offset by higher revenue contribution from aviation fuel sales.

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 FY2012 increased by RM864.5 million to RM29.5 billion, from the results of the corresponding 12-month period. The increase was attributed to marginal increases in both average selling prices and sales volume. Consolidated profit before tax was RM49.3 million lower at RM1,165.2 million, from the 2011 due to a decline in fuel margins and increased operating expenses which was partly offset by a RM43.3 million increase in other income. 

With the exception of 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 government in relation to sales of subsidised retail products. PDB’s CFO turned positive on the back of the normalisation of its receivables level during FY2012 with free cash flow of RM604.6 million and cash and cash equivalents of RM251.3 million. Prior to PE2011, PDB funded its business operations and expansion almost entirely through internally generated funds. Proceeds from the current sukuk issuance will be applied towards PDB’s working capital requirements as well as to fund its growth-related capex. 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.

Contacts:
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my;
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my.