MARC has assigned final ratings of MARC-1IS /AAAIS to PETRONAS Dagangan Berhad’s (PDB) Islamic Commercial Papers and Islamic Medium Term Notes (ICP/IMTN) Programme (Sukuk 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 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 the first six months of 2013 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 its lubricants segment has defended its market share of the competitive lubricants market. Supported by its well-recognised PETRONAS brand and the broad national footprint of petrol stations, PDB’s retail segment has demonstrated the ability to sustainably grow revenue and expand profitability despite less favourable economic conditions. 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 key customers as well as its extensive supply, distribution and logistics system throughout the country.

As at end-December 2012, PDB completed the acquisition of six PETRONAS subsidiaries involved in the lubricant and LPG marketing segments in Philippines, Thailand and Vietnam. Notwithstanding the growth potential and diversification benefits afforded to 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 the 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. 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).

Historically, PDB’s cash flow from operation (CFO) has been strong in most years and sufficient to cover its capex requirements and financing obligations. Capital expenditures typically represent about 30% to 50% of CFO per annum. 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.

The preliminary rating announcement was first made on April 19, 2013. Upon review of the final documentation of the Sukuk Programme, MARC is satisfied that the terms and conditions of the Sukuk Programme have not changed in any material way from the draft documents on which the earlier preliminary ratings of MARC-1IS/AAAIS were based.

The full Credit Analysis Report will be made available on MARC’s website at www.marc.com.my.

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