Petronas Dagangan vs Petron Malaysia

[i4value]

There are 2 Bursa companies in the service station sector – Petronas Dagangan and Petron Malaysia. The former is about double the size of the latter in terms of revenue. You may think that this may give Petronas Dagangan some advantage

But you can see from the chart below that Petron Malaysia is no pushover and is able to compete. So which would you chose to invest from a fundamental perspective?

[i4value]

In Malaysia, the Bahasa term “jaguh kampung” (literally “village champion”) is meant to belittle a person who is so full of himself after achieving some record feat in the country.  The idea is that the person should be benchmarking himself globally rather than just nationally.

I fell into this “village champion” category when I first started value investing as I had a track record of bearing the KLCI (Bursa Malaysia index) over several years. Then I started to look at investment case studies and invariably the majority of them relate to US stocks.

I am not sure whether it is the stronger economy or the size of the market, but the stock market returns of many US companies far exceed those in Malaysia. To give you a sense of this, over the past 25 years, the KCLI grew at 3.9 % CAGR compared to the S&P 500 CAGR of 5.8 %.

The chart below is another example. It compared the share price trend of Bursa Malaysia Petronas Dagangan with some of the US Oil & Gas companies with petrol stations operations. It is not exactly apple to apple but you can see the better share price performance of the others.



Beating the KLCI was not so great. If I had set my sights on the US market years ago, I might have made more even if I just matched the S&P 500.

Moral of the story. To max your stock returns, you should focus on those stock exchanges with the better returns. There is no point being the village champion unless your village is the best in the world.

Nowadays I have diversified my investments to cover the US as well. For more insights from case studies to go “Can we learn anything from investment case studies?”

[weijian]

There are 2 Bursa companies in the service station sector – Petronas Dagangan and Petron Malaysia. The former is about double the size of the latter in terms of revenue. You may think that this may give Petronas Dagangan some advantage

But you can see from the chart below that Petron Malaysia is no pushover and is able to compete. So which would you chose to invest from a fundamental perspective?

Hi i4value,

Petron Malaysia (PM) is ~50% geared while Petronas Dagangan (PDB) is <5%. So after accounting for the gearing in the denominator in the ROE calculation, PM should be much worst off than PDB. PDB also has negative working capital (~1billion or 20% of equity) and so it is much more capital efficient than PM. Somehow, PDB is enjoying some good payment terms from its parent while collecting cash straightaway from those who pump ron95.

PM also has refinery operations in the group and so a lot inventories involved in its refine/store/distribute of its commercial oil products. PDB is holding negligible inventories with a turnover of ~1.5days.

2 Msian gov-related entities hold 75% of the shares in PDB (64%-Petronas, 11%-EPF). This probably explains why it is paying 100% of its profits in last few years - most of this money is been paid upwards, and towards paying down obligations of the Gov spending and the improbable high EPF interest. The high payout ratio also suggest there is little need for CAPEX spending for PDB, unlike PM which has refinery/oil terminals to spend CAPEX on. PDB does own/operate some pipeline/terminals as well but it is on associate/JV level and not reflected on its consolidated cashflows.

So it is quite clear from fundamental perspective that PDB is a better investment candidate than PM.

[i4value]

don't you differentiate between a good company and a good investment? I agree that PD may be relatively better from a fundamental perspective. But this is a relative look. I would say that Petron fundamentals are ok.

But when you look at valuation, PD has a PE of 20 compared to Petron PE of 4. PD has a 3.6 PBVG whereas Petron PBV is 0.5.

[weijian]

Hi i4value,

As a result of your thread, I decided to look at both companies. When I looked at both of them, I did not check out their share price nor valuation. Generally, I try to review "blind" first so that the cursory review is not tainted by any biases related to the prices.

If you read back my statement - "So it is quite clear from fundamental perspective that PDB is a better investment candidate than PM", I am only making a conclusion who has better fundamentals. I have not dwelled more into valuations nor "Which is a better investment?".

I totally agree that a good company and good investment are different. BUT they aren't too different as many "value investors" would like to believe. Flipping it around - a bad company and bad investment are different, but they ain't too different.

Back to PDB vs PM. There is a reason Mr Market values PDB selling at high PE and above book, and my earlier cursory studies might have explained part of it. Mr Market seldom makes mistakes but we can thoroughly say that PDB is reasonably priced because the reason/s for its higher valuations are pretty obvious here. There could be no margin for bad things happening in the future.

Now we turn our attention to PM, selling at single digit PE and half of BV as per your post. Is PM is underpriced then? Without an indepth study, I have no idea. But it is quite obvious to me that PM's business is not exactly very comparable to PDB because PM has refinery operations and it doesn't have a parent like PDB to shield the FX fluctuations (50% of its payables in USD but just 10% of receivables in USD), payables, inventories carry and many others.

Personally, I think that comparing PDB vs PM via fundamentals and then valuations - and because of the comparison, thinking that PM is cheap, isn't very robust.

[donmihaihai]

If I go blind, just by looking at the numbers without anything except that they operate in Malaysia and numbers belong to FY2022 & FY2023, I will simply say.

In a normal environment, without Covid,

Co. A GPM is low @ about 3% EBTM @about half of GPM. It also has close to zero operating leverage because a double of revenues produces the about the same GP and PBT. A high asset turnover company with revenue and cos @ 15 & 17X receivables and inventory. PPE look low but not that low. Trade payable and loan should support AR, inventory and PPE. But a double of revenues and COS hardly result the same in working capital mean lot of them took place without or minimum credit term.

Co. B GPM is low but not that low @ about 9.7% EBTM @ about 1/3 of GPM. There are a lot of activities between GP and EBT. Also operating leverage in work here, a drop of about 2.5% GPM was cancelled by increased in revenues resulted in close to similar EBTM. A high asset turnover company but not as high as Co. A with revenue @ 9X receivables and non-existent of any inventory. Inventory is not making any sense. Trade payable support trade receivables and does move with sales activities, but not 1 : 1.

Without the PPE, I would straight aways say CO. A is a paper trader. Of course, I am not looking blind since it is said that Co. A has a refinery business. So, refinery business should be huge. Co. B has higher margin, invested in quite some PPE, so it is doing some value added. Co. B operation is certainly more complicated with operating leverage.

The main point is, if I go blind, I would not even want to put them side by side for a comparative analysis. Both co. does not smell, look and feel the same.

Try going blind sometime, and without other people labeling for you, I would bet many would look at those companies in a different light.

[i4value]

I think you can seldom find 2 companies that are exactly the same in terms of the business model. In the Malaysian case, there are not enough listed companies in the petrol station business. There are only 2 - Petronas Dagangan, Petron Malaysia. There is BHP under Boustead, but BHP is just one of the many businesses under Boustead

My focus was Petron Malaysia - the comparison with Petronas was just a small part of my analysis.

[weijian]

don't you differentiate between a good company and a good investment? I agree that PD may be relatively better from a fundamental perspective. But this is a relative look. I would say that Petron fundamentals are ok.

But when you look at valuation, PD has a PE of 20 compared to Petron PE of 4. PD has a 3.6 PBVG whereas Petron PBV is 0.5.

hi i4value,

So what are the fundamentals with regards to Petron that make you think "it is ok"?

[donmihaihai]

I think you can seldom find 2 companies that are exactly the same in terms of the business model. In the Malaysian case, there are not enough listed companies in the petrol station business. There are only 2 - Petronas Dagangan, Petron Malaysia. There is BHP under Boustead, but BHP is just one of the many businesses under Boustead

My focus was Petron Malaysia -  the comparison with Petronas was just a small part of my analysis.

I wrote "Both co. does not smell, look and feel the same" 
No one say exactly the same. 
Let me borrow Warren Buffett. 

I would rather be vaguely right than precisely wrong.