Petron Malaysia – is there an investment opportunity

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In my latest blog article, I covered Petron Malaysia and showed that it is not a value trap. My investment thesis can be summarized as
  • As of 30 Oct 2023, Petron Malaysia was trading at about half of its Asset Value and EPV. With the Asset Value about the same as the EPV, I have great confidence in the margin of safety.
  • The Group suffered due to the measures taken to control Covid-19. With this behind us, it should deliver better profitability. However, this was impacted by high crude oil prices.
  • The Group is financially sound and while there is the threat of the disruption of the petrol station business model, it is not imminent

A comparison between the past decade ROE and share price trend showed a discrepancy. You can see that the market price has yet to reflect the improved ROE. Is this an investment opportunity?

[Image: Petron-M.png]
Budget 2024 has indicated that fuel subsidies will be reducing and electrification accelerated. These are 2 trends that go hand in hand - electrification will soften the political impact of subsidy reduction. And both trends will be headwinds to come for the petrol kiosk business in Msia:

Reduction of fuel subsidies Economic Affair Minister Rafizi has announced that targeted subsidies for ron95 will be starting in 2H24. If we assume this reduction is structural and irreversible, gasoline demand will reduce from current levels despite the evidence of accelerating car sales that we have witnessed post covid. In other words, the current demand for petrol in Msia is artificially inflated by gov subsidies and the gradual removal of subsidies will be a headwind.

Electrification Personally I suspect the petrol station business model will still be intact with electrification and the latter will complement it. EV charging terminals will probably be set up at these petrol stations in synergy with the coffee/QSR/convenience outlets for a one stop "rest/relax/charge". But this will involve future large CAPEX to do these terminal installations. They could share part of the costs with their dealers OR defray it by renting out the space to EV charging infrastructure owners? However, it involves to be seen how the margins compare to current distribution/retail of petrol.
Most of the global Oil & Gas companies (eg Shell, ExxonMobil) are getting our of the service station business as it is not as lucrative as the upstream business. So it is the new players in here. So in Malaysia we have BHP (Boustead) and Petron. There is of course Petronas but this is a different story. They seem to be going into retail and I am not sure whether the current EV charging station set-up will work for them as it takes time to charge the EV. I would imaging that car parks in shopping centres and office blocks would eventually have charging stations for EV.
We do not need to imagine that "car parks in shopping centres and office blocks would eventually have charging stations for EV" because it is already mostly there.

Nonetheless, I took a look at the EV charging map for Msia, which details all the current EV charging stations. And I see that besides the usual shopping centers, hotels and commercial buildings' parking lots, there are also several petrol stations providing EV charging service. So what I said is not new, just that it is not as prevalent. I would imagine these petrol stations have integrated facilities for rest/relax/eat to expand the customer's wallet share.

Petrol stations are distribution centers, with many of them already located strategically along infrastructure points (eg. outside malls, at entrance/exit of Tamans, along the highway rest stations etc). So I am pretty sure they will make good use of their advantage to pivot. The only questions from an investor standpoint, is the capital required to pivot and the ROE....

List of EV charging in Msia:
I think we have the "chicken or the egg" situation. We all need more convenient charging stations but then are there enough EV to justify it. I think that in the Malaysian context, the existing petrol stations will continue to be around for the next 5 years so there is still a market to serve. The issue is what comes next. I suspect that unless EV charging can be done within a few minutes the petrol stations will have difficulty converting to EV charging stations. Secondly, it the prices of the EV chargers come down, many homes will install their own EV charger. The petrol station business will have to be transformed as I don't think there is any model of what it will be.

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