MARC has affirmed its MARC-1IS/AAAIS ratings on PETRONAS Dagangan Berhad's (PDB) Islamic Commercial Papers (ICP) and Islamic Medium-Term Notes (IMTN) Programme of up to RM2.0 billion. The outlook on the ratings is stable.

Posted date: January 20, 2017

MARC has affirmed its MARC-1IS/AAAIS ratings on PETRONAS Dagangan Berhad's (PDB) Islamic Commercial Papers (ICP) and Islamic Medium-Term Notes (IMTN) Programme of up to RM2.0 billion. The outlook on the ratings is stable.

PDB's affirmed ratings are equalised to that of its parent, Petroliam Nasional Berhad (PETRONAS) based on MARC's assessment of a very strong parent-subsidiary relationship as reflected by significant operational linkages between them. PDB serves as the downstream arm of its parent's oil and gas operations. MARC currently maintains public information ratings of MARC-1/AAA /Stable on PETRONAS.

PDB's standalone credit profile remains healthy, underpinned by a strong domestic market position in two key business segments, namely retail (mainly mogas and diesel) and commercial (mainly aviation fuel and diesel), both of which are the main drivers of its revenue and profitability. PDB's two other business segments are liquefied petroleum gas (LPG) and lubricants. PDB benefits from a wide logistics network of more than 1,000 petrol stations, the largest in the country, and from high recognition of the PETRONAS brand. Its retail segment benefits from the Automatic Pricing Mechanism (APM) through which the company is assured of a fixed profit rate. This affords some degree of earnings stability in the retail segment. However, earnings from the commercial segment remain volatile, stemming from high susceptibility to economic conditions.

For 9M2016, PDB recorded lower revenue of RM15,779.4 million (9M2015: RM19,041.7 million), while pre-tax profit was 8.4% lower year-on-year (y-o-y) at RM876.3 million. The revenue decline was due to lower Means of Platts Singapore (MOPS) prices with which retail pump prices move in tandem. PDB's profitability was impacted by an impairment of RM89.9 million on the outstanding subsidy receivables from the government due since 2013. Excluding impairment charges and net gain on disposal of PETRONAS (Vietnam) Co. Ltd (PVL) for RM31.5 million, pre-tax profit would have declined by 2.4% to RM934.7 million.

MARC notes PDB's operating profit margin has continued to improve, recording 5.55% as at end-9M2016 (2015: 4.35%; 2014: 2.25%). The improvement reflects the improved margins from diesel, fuel oil and aviation, higher other income as well as the gains PDB has made from its recent cost optimisation initiatives. Cash flow from operations (CFO) rose sharply to RM1,286.8 million, benefitting from favourable working capital movement (9M2015: RM514.7 million). Given the lower capex of RM66.3 million and dividend of RM457.0 million during the period, free cash flow was higher at RM780.0 million (9M2015: negative RM197.0 million). PDB's overall liquidity position improved with cash and cash equivalents rising to RM2,018.4 million as at end-September 2016 (2015: RM1,258.6 million). PDB's leverage position remained very strong with a debt-to-equity ratio of 0.02x as at end-September 2016. This is not expected to significantly increase in the near term in view of PDB's healthy cash flow position against its moderate expected annual capex of about RM400 million.

The stable outlook on the ratings reflects MARC's expectation that PDB's credit profile would remain within the rating threshold, underpinned by the high likelihood of parental support from PETRONAS.

Contacts: Afeeq Amiri, +603-2082 2256/ afeeqamiri@marc.com.my, Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.