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| Petronas Station with "Mesra" convenient store |
Introduction
Formed in 1982 and listed in 1994, PDB or better known as PETDAG is the principal domestic marketing arm of PETRONAS (our dear national oil corporation; a world class company) which holds 70% of its equity.Its business line can be segmented into four key areas by order of importance; retail, commercial, lpg (liquified petroleum gas) and lubricants. Its retail division holds a 32% market share and contributes more than 50% of the company's profitability. This comes in the form of 970 Petronas stations nationwide together with nearly 550 "Mesra" convenience stores located at its service stations.
Commercially it has the largest market share of 64% through the sales of diesel, jet fuel and bitumen. As of 2009, Petronas is now Malaysia's no.1 selling cooking gas after capturing the leadership at 52%. It is also the only local company to market NGV (natural gas vehicle). Lubricant wise, it has a 17% market share.
Fundamental
1. Does the company have an identifiable durable competitive advantage?
With parent Petronas having being the 13th most profitable company in the world and the most profitable in Asia, its resources stand at a very respectable level. Also the corporation is vested with the entire oil and gas resources in Malaysia including the responsibility to develop and add value to them.
2. Do you understand how the product/service works?Dig, refine, distribute and sell. How complex can it be :)
As with all petroleum companies, their resources are exhaustible. At our current production rate, Malaysia will run out of oil in 18 years and gas in 35 years. Though it is hard if not impossible to take a crystal ball and imagine how the petroleum giants will be in the future, I think Petronas will grow to become something else perhaps an alternative energy company since this is an area of their expertise.
4. Does the company allocate capital exclusively in the realm of its expertise?
Yes. It has always done so. With an announced capex of RM500 million for financial year 2010/2011, more capital will be poured into expanding their retail segment (their main focus) as well as infrastructure plans to support it.
5. What is the company's financial history and status?
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| Financial Chart 1 (PM, ROE and Revenue GR) |
Net profit margin (PM) has been relatively stable at less than 4%. However the return of equity (ROE) is commendable as PETDAG has been able to hold it in between 10% to 20% range on average which shows management fiscal adeptness. Revenue GR on the other hand has shown much volatility which is attributed to global oil & gas prices and demand. Oil and gas are considered a commodity and as all commodities, they have their share of bubbles and burst.
Below is the 5-year average for the company. Sector is more broadly categorised like Trading/Services while industry is much more specific; for PETDAG is it Petroleum Products.
- Net Profit Margin: 3.06% vs 9.20% (Industry), 10.11% (Sector)
- Gross Profit Margin: 8.35% vs 16.24% (Industry), 27.16% (Sector)
- ROE: 17.25% vs 18.49% (Industry), 16.61% (Sector)
- Revenue Growth Rate: 10.69% vs 22.19%, 14.62% (compounded annual growth rate)
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| Financial Chart 2 (EPS and DPS) |
With revenue levels affected by global oil prices and demand, the EPS is also expected not to be in linear-like trend. Nevertheless the dividend payouts never exceeded their earnings and is on the rising trend thanks to the management who values shareholder's interest. The dividend yield for PETDAG is astonishingly good at 3.9% as compared to the industry of 1.23% and sector of 1.62%.
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| RK20011 black RM28 @ LovelyClo |
6. Is the company conservatively financed?
PETDAG has been profitable ever since it has been listed and has never incurred debt. All financing are generated and funded internally. As of AR2010, their cash and cash equivalents stands at RM912 million and this figure is growing over the last 10 years.
7. Is the company actively buying back its shares?
No but PETDAG is doing its best by rewarding shareholders in terms of good dividend yield.
8. Is the company free to raise prices with inflation?
Yes. They raise their price in accordance to demand and supply factor. As for kedai 'Mesra' this I am not too sure but with their main focus on this segment I think they will make their price competitive and at the same time profitable.
9. Are large capital expenditures required to update plant and equipment?
Yes. PETDAG has announced that it will spend a capital expenditure of RM500 mil for financial year 2010/2011. In previous years they have also spend that much within the vicinity of RM300 mil to as high as ~RM700 mil in certain years.
Discounted Cash Flow Analysis
Revenue Growth Rate: History 17%, Optimistic 15%, Realistic 12%
Operating Costs: 96% (very high I know)
Operating Costs: 96% (very high I know)
Corporate Tax: 25%
Capital Expenditures: RM500 million +3%/year
Depreciation: RM320 million +3%/year
Working Capital Cost: in tandem with growth rate
Discounted Rate: 10%
Drum roll please....Petronas Dagangan Berhad is fairly valued at RM11.23. The current trading price of RM11.58 put it slightly above fair value. It is hard to gauge how the revenue will perform year by year therefore I have also computed the fair value for respective growth rates: 10% (RM10.50), 15% (RM12.39) and 17% (RM13.20). It comes to no surprise that some research houses have a buy call while some have a sell call on PETDAG, because it is difficult to see how the revenue growth rate will be, you just need to take your best guess.
Conclusion
I have mixed feelings towards this counter. First, it is a government linked company though it is a really good world class parent company PETRONAS. It can be a bigger and better company if not for the streams of dividends being given to the government in which not all are being used in the correct manner. A total of RM410 billion has been paid to the govt. That is a lot of money!
Second, the net profit margin is rather thin. Even the gross margin is only ~8%. This pales in comparison to the sector as a whole even though domestically PETDAG is the best. This is perhaps because we do not produce as much oil and gas as other giants do like those in the middle eastern countries. We suffer from economies of scale.
What I do like about PETDAG is the generous dividend payout even for such a company that requires high capital expenditure year after year. PETDAG is also taking their petrol stations to a higher level by adding more value to customers by providing convenient services such as ATMs, Touch n' Go facilities, e-pay terminals and express bus counters. The company also team up with local food and beverage players, banks and transportation players to provide better services at their petrol stations. These players include MCD, KFC, Dunkin Donuts, Konsortium Transnasional Berhad, Maybank and CIMB Bank.
They are also spearheading the bio-diesel B5 implementation which will provide more volume growth in this segment. With its financial prowess, PETDAG has the means to take leadership in the markets that they want to focus on. With many years of profitability, I am sure they will continue to be the same at least before the world's oil and gas runs out.
Will it be in my list of smart pickings? If only I had extra capital and with the criteria that my other pickings are not at a good buy. Trading on PETDAG has to be done wisely as the volatile share is not something to be overlooked. If it is bought at a wrong time, you could be holding it for some time before you get to see some real returns. The question is, can you continue to hold it when the tough gets going? I will not refute that it is still a company whose share is worth a look.
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| 8372 White Top RM34 @ LovelyClo |
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