Is Petronas Dagangan an investment opportunity?

Value Investing Case Study 97-1: A fundamental analysis to show that Petronas Dagangan is a quality compounder facing a strategic crossroads.  

Petronas Dagangan Berhad (PETDAG or the Group) is the retail and marketing arm of Malaysia’s national oil company, Petronas. It has long been a dominant player in the domestic downstream fuel sector. 

With a vast network of service stations and a strong portfolio of fuel and non-fuel offerings, the company has delivered stable financial performance across economic cycles. However, the global energy landscape is shifting towards decarbonisation and electric mobility.

Investors must now reassess whether PETDAG’s historical strengths can translate into sustainable value in the years ahead. This article evaluates PETDAG’s financial track record, peer positioning, and strategic readiness to determine if it remains a worthwhile investment opportunity.

My findings suggest that the Group is fundamentally sound. However, at the current market price, there is no margin of safety.

Should you go and still buy it? Well, read my Disclaimer. 

Contents

• Company background

• Operating performance

• Financial position

• Valuation

• Conclusion

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Company background

Over the past decade, PETDAG transitioned from a traditional downstream petroleum marketer into a sustainability-driven, digitally enabled, community-anchored retail and mobility company. Its evolution reflects Malaysia’s broader energy transition while reinforcing national development goals and stakeholder trust.

Today, the Group’s business drivers are a blend of:

• Operational excellence and market penetration (traditional fuel and lubricants),

• Diversification and innovation (convenience, digital, mobile refuelling),

• Stakeholder trust and ESG leadership,

• Alignment with macroeconomic and policy tailwinds (infrastructure, climate targets, digital payments).

This strategic mix allows PETDAG to thrive in a low-margin fuel industry while positioning it for long-term resilience. As of 2024, PETDAG has organized its operations under three business segments: retail, commercial, and convenience. Refer to Chart 1. 

• Historically, the Retail segment was the biggest revenue contributor, accounting for about half of the Group’s revenue. 

• The Convenience segment is a very small segment accounting for about 1 % of the Group’s revenue.

The Group serves the Malaysian market.

Chart 1: Segment details

There was only a 45 % correlation between Brent crude oil price and PETDAG revenue from 2010 to 2024. 

The 45% correlation reflects that while Brent crude sets a baseline cost for fuel products, PETDAG's revenue is shaped by regulated pricing, sales volume, and diversification. The company’s downstream, domestic-facing business model insulates it from full exposure to global oil price swings.

Operating performance

Over the past decade, the Group’s revenue grew at a CAGR of 4.7%, while PAT expanded at a CAGR of 3.9%.

As shown on the left side of Chart 2, both revenue and PAT declined in 2020 and 2021. This setback was primarily driven by the external shocks of the COVID-19 pandemic, including severe mobility restrictions, a collapse in oil prices, and weak consumer demand. These disruptions impacted both sales volume and margins, especially in the Retail and Commercial segments.

Following this period, the Group staged a recovery, with revenue, profit, and returns rebounding in tandem. However, the operating landscape continues to face structural challenges, most notably from the energy transition. PETDAG has highlighted several key risks to its core fuel-based revenue streams:

• The rise of electric vehicles (EVs), which threatens long-term retail fuel demand.

• The growing importance of sustainable aviation fuel (SAF) and evolving emissions mandates, impacting aviation fuel dynamics.

• Government policies such as the National Energy Transition Roadmap and global climate reporting frameworks, which are accelerating the shift away from fossil fuels

Despite these headwinds, the Group has delivered strong returns over the past decade, averaging 24% in return on invested capital (ROIC) and 15% in return on equity (ROE). These figures exceed the estimated cost of capital of 9%, indicating that meaningful shareholder value was created.

Chart 2: Performance Index and Returns

Chart 3 illustrates that while gross profit margins improved, overall profitability was held back by rising Selling, General, and Administration (SGA) expenses. The gross profit margin trend reflects both strategic shifts and cyclical dynamics:

• 2015–2020: Structural margin expansion driven by better product mix, inventory optimisation, and cost control.

• 2022: A temporary margin compression due to elevated input costs and timing mismatches.

• 2023–2024: Recovery supported by digitalisation, a stronger focus on margin-accretive products, and efficiency initiatives.

In contrast, the SGA margin moved in the opposite direction. Over the past decade, the SGA margin trended upward, peaking in 2020, followed by a brief decline in 2021 to 2022, and rising again in 2023–2024. This pattern reflects distinct phases in the company’s cost structure:

• 2020 spike: Revenue fell 38% due to the pandemic, while SGA declined by only 11%, resulting in a margin spike.

• 2021–2022 decline: Marked by cost discipline and digital adoption, which improved efficiency even amid modest revenue growth.

• 2023–2024 increase: Attributable to strategic investments in growth, sustainability, and digital infrastructure, rather than operational inefficiency

Chart 3: Margins and Operating Profit

Note to Op Profit. I broke down the operating profits into fixed costs and variable costs.

• Fixed cost = SGA, Depreciation & Amortization and Others.
• Variable cost = Cost of Sales that excluded Depreciation & Amortization.
• Contribution = Revenue – Variable Cost.
• Contribution margin = Contribution/Revenue.

These margin dynamics offer important valuation insights. Specifically, the long-term trends in gross profit and SGA margins suggest that contribution margin and fixed cost margin should be estimated based on multi-year averages. 

This approach smooths out temporary distortions caused by events such as the pandemic, commodity price swings, and large-scale ESG investments, and yields a more accurate picture of the Group’s normalized unit economics and cost structure.

Efficiencies

In a low revenue growth environment, the focus should be on operating and capital efficiencies. The track record here was mixed:

• Operating efficiency. While there was an improving trend in asset turnover, there was no clear improving trend for operating expense ratio, operating profit margin, and ROA.

• Capital efficiency. There was an improving trend in the Reinvestment margin and gross profitability. But the cash conversion cycle deteriorated while the asset turnover remained unchanged. 

While the company has taken steps to improve its operating and capital efficiency, the mixed results mean that these efforts remain a work in progress. 

On the operating front, the company has embraced digitalisation as a key lever, automation of retail fuel transactions, and optimisation of its logistics network. 

In terms of capital efficiency, its strategic pivot toward non-fuel revenue streams, including convenience retail and partnerships, signals an intent to shift toward asset-light, margin-accretive growth.

Peer comparison

I compared PETDAG with several Oil & Gas players in the region with strong retail operations. Refer to Table 1.

i) Petron Malaysia Refining & Marketing Bhd (PETRONM). A downstream oil company in Malaysia engaged in refining, marketing, and retailing petroleum products through a nationwide network of service stations.

ii) Petron Corporation (PCOR). The largest oil refining and marketing company in the Philippines, with integrated operations spanning refining, fuel retail, commercial supply, and exports across the Philippines and Malaysia.

iii) PTG Energy Public Company Limited (PTG). One of Thailand’s largest independent fuel retailers, operating a fast-growing network of PT-branded service stations, convenience stores, and logistics services with a focus on digital integration.

iv) Pilipinas Shell Petroleum Corporation (SHLPH). A leading Philippine fuel retailer and marketer offering petroleum products, lubricants, and non-fuel services through over 1,100 Shell-branded stations, with a strong focus on ESG and mobility solutions.

PETDAG ranked No. 2 in terms of 2024 revenue, but was among the worst performers in terms of the revenue growth rate.

Table 1: Peer revenue

I compared PETDAG performance based on 4 metrics as shown in Charts 4 and 5. 

Over the past decade, PETDAG has emerged as one of the most consistently high-performing downstream oil and gas companies in the region. Taken together, PETDAG's superior capital efficiency, robust margins, and resilient earnings growth position it as a regional leader among downstream fuel and retail energy players.

• PETDAG return on capital initially ranked No. 3, but by 2020, it ranked No. 1, and post-2022, it far outperformed its peers.

• Its EBIT margin was, for many years, above average, and by 2022, it was consistently in the top 2 positions.

• PETDAG had a volatile free cash flow margin. There were 4 years when it ranked No. 1, but it ranked last in 2023, only to bounce back to No. 1 in 2024.

• Over the past decade, in terms of the quantum of EPS, PETDAG was among the top 2.  I would also rank it No. 2 in terms of EPS growth rate from 2015 to 2024.

Chart 4: Peer Return on Capital and EBIT Margin

Chart 5: Peer Levered Free Cash Flow Margin and EPS

Case Notes The fuel retail sector is undergoing a structural shift as the global push toward decarbonisation accelerates. The rapid adoption of electric vehicles (EVs) poses a direct threat to long-term demand for petrol and diesel, particularly in urban and developed markets.  Government policies such as carbon pricing, fuel subsidy reform, and the introduction of national energy transition roadmaps are hastening the decline of fossil fuel dependence. Additionally, rising ESG expectations and sustainability regulations are increasing compliance costs and reshaping business models.  Fuel retailers also face increasing competition from new entrants in EV charging infrastructure, while returns on early-stage green investments remain uncertain.  Collectively, these factors present a long-term risk to volume, margins, and capital productivity for traditional fuel retailers. As you can see, there are many issues to consider when carrying out a fundamental analysis of companies in this sector. This requires expertise and time.  Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format. You can see the position of PETDAG as of 6 May 2025 in the Fundamental Mapper chart below. Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies   PS: For companies falling into the Goldmine quadrant, the focus of your fundamental analysis is to assess whether it can sustain its performance. Then you can be assured that it is not a value trap.

Case Notes

The fuel retail sector is undergoing a structural shift as the global push toward decarbonisation accelerates. The rapid adoption of electric vehicles (EVs) poses a direct threat to long-term demand for petrol and diesel, particularly in urban and developed markets. 

Government policies such as carbon pricing, fuel subsidy reform, and the introduction of national energy transition roadmaps are hastening the decline of fossil fuel dependence. Additionally, rising ESG expectations and sustainability regulations are increasing compliance costs and reshaping business models. 

Fuel retailers also face increasing competition from new entrants in EV charging infrastructure, while returns on early-stage green investments remain uncertain. 

Collectively, these factors present a long-term risk to volume, margins, and capital productivity for traditional fuel retailers.

As you can see, there are many issues to consider when carrying out a fundamental analysis of companies in this sector. This requires expertise and time. 

Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format.

You can see the position of PETDAG as of 6 May 2025 in the Fundamental Mapper chart below.

Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies

 

PS: For companies falling into the Goldmine quadrant, the focus of your fundamental analysis is to assess whether it can sustain its performance. Then you can be assured that it is not a value trap. 

Case Notes

The fuel retail sector is undergoing a structural shift as the global push toward decarbonisation accelerates. The rapid adoption of electric vehicles (EVs) poses a direct threat to long-term demand for petrol and diesel, particularly in urban and developed markets. 

Government policies such as carbon pricing, fuel subsidy reform, and the introduction of national energy transition roadmaps are hastening the decline of fossil fuel dependence. Additionally, rising ESG expectations and sustainability regulations are increasing compliance costs and reshaping business models. 

Fuel retailers also face increasing competition from new entrants in EV charging infrastructure, while returns on early-stage green investments remain uncertain. 

Collectively, these factors present a long-term risk to volume, margins, and capital productivity for traditional fuel retailers.

As you can see, there are many issues to consider when carrying out a fundamental analysis of companies in this sector. This requires expertise and time. 

Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format.

You can see the position of PETDAG as of 6 May 2025 in the Fundamental Mapper chart below.

Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies

 

PS: For companies falling into the Goldmine quadrant, the focus of your fundamental analysis is to assess whether it can sustain its performance. Then you can be assured that it is not a value trap. 

Case Notes

The fuel retail sector is undergoing a structural shift as the global push toward decarbonisation accelerates. The rapid adoption of electric vehicles (EVs) poses a direct threat to long-term demand for petrol and diesel, particularly in urban and developed markets. 

Government policies such as carbon pricing, fuel subsidy reform, and the introduction of national energy transition roadmaps are hastening the decline of fossil fuel dependence. Additionally, rising ESG expectations and sustainability regulations are increasing compliance costs and reshaping business models. 

Fuel retailers also face increasing competition from new entrants in EV charging infrastructure, while returns on early-stage green investments remain uncertain. 

Collectively, these factors present a long-term risk to volume, margins, and capital productivity for traditional fuel retailers.

As you can see, there are many issues to consider when carrying out a fundamental analysis of companies in this sector. This requires expertise and time. 

Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format.

You can see the position of PETDAG as of 6 May 2025 in the Fundamental Mapper chart below.

Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies

 

PS: For companies falling into the Goldmine quadrant, the focus of your fundamental analysis is to assess whether it can sustain its performance. Then you can be assured that it is not a value trap. 

Financial position

I would consider the Group as financially strong.

As of Dec 2024, it had RM 2.1 billion in cash. This is equal to 19 % of its total assets. 

As of Dec 2024, it had a debt-equity ratio of 2 %. Its past decade high was only 6 %. 

Over the past decade, it had an average negative 1% Reinvestment rate (Reinvestment/NOPAT). This meant that a big part of the NOPAT could be returned to shareholders. Reinvestment = CAPEX & Acquisition – Depreciation & Amortization + increase in Net Working Capital. The negative arose because the Depreciation & Amortization was greater than the CAPEX & Acquisition.

Over the past decade, there was only 1 year that it failed to generate positive cash flow from operations. During this period, it generated RM 10.4 billion in cash flow from operations compared to the total PAT of RM 8.7 billion. This is a good cash flow conversion ratio.

It had a good capital allocation plan. Refer to Table 2. The cash flow from operations was sufficient to fund its CAPEX. Excess was returned to shareholders.

Table 2: Sources and Uses of Funds 2015 to 2024

Valuation

My analysis showed that PETDAG is a mature company with a low revenue growth rate. While there was margin expansion, this was offset by the rising fixed costs. I thus based my valuation on the single-stage Free Cash Flow to the Firm model with the following assumptions. 

• The base revenue would be the 2024 revenue with a 4% perpetual growth rate.

• The based contribution margin, fixed cost margin, and capital turnover would be the 2015 to 2024 average values. 

• The Reinvestment rate would be based on the past decade's values.

• The tax rate would be the decade’s average. 

On such a basis, I obtained an intrinsic value of RM 22.49 per share compared to its market price of RM 21.22 per share (23 Jun 2025). There is only a 6% margin of safety based on this intrinsic value.

Valuation model

I valued PETDAG based on a single-stage valuation model, as shown in Table 3. The basic equations used in the model are:

Free Cash Flow to the Firm or FCFF = EBIT(1 – t) – Reinvestment.

EBIT = Revenue X Contribution margin – Fixed cost. The earning was based on the business model shown in the left part of Chart 3.

Reinvestment was derived from the Reinvestment margin.

Fixed cost was based on the fixed cost margin.

Table 3: Sample calculation

The cost of funds was based on the first page results of a Google search for “Petronas Dagangan WACC”. Refer to Table 4.

Table 4: Estimating the cost of funds

Risks and limitations

I would like to think that my assumptions have not been aggressive. I found the following when I compared the projected values with the historical performance. 

• ROIC of 23.8 % compared to the past 3 years' average of 25.2 %.

• EBIT margin of 3.9 % compared to the past 3 years' average of 3.6 %.

Having said that, I have been a bit optimistic about the Reinvestment rate. My model assumed a zero Reinvestment rate based on the historical rate. But in the long run, this should be governed by the fundamental growth equation.

Growth = Return X Reinvestment rate.

Based on 4% perpetual growth rate and a 23.8 % ROIC, the long-term Reinvestment rate should be 17%. If I had assumed a 17% Reinvestment rate, the intrinsic value would reduce to RM 18.92 per share.

Will there be any upside? If you assumed improvements in both the contribution margin and cost control. Unfortunately, the track record is not encouraging. 

However, the most significant investment risk lies in PETDAG’s fuel retail model. The growing adoption of electric vehicles signals a structural shift that will eventually disrupt this business. While the timing and extent of the impact on PETDAG’s earnings remain uncertain, the risk is real and approaching.

Yet, my valuation model currently assumes business continuity in perpetuity — an assumption that may not fully account for the long-term implications of this transition.

Conclusion

PETDAG stands out as a fundamentally strong and strategically evolving company in the regional downstream energy space. Over the past decade, it has delivered consistent profitability and resilient earnings growth. This is even amid structural headwinds like the COVID-19 pandemic and the accelerating global energy transition. 

While recent years saw rising SGA costs and modest top-line growth, PETDAG’s return metrics over the past decade remained well above its cost of capital, affirming its ability to create shareholder value.

Its performance relative to regional peers further reinforces its investment merit. PETDAG ranked among the top in return on capital, EBIT margin, and EPS growth. The company also maintains a strong balance sheet, disciplined capital allocation, and prudent reinvestment levels, all of which underpin its financial resilience.

That said, the sector faces growing structural risks from EV adoption, decarbonisation mandates, and changing consumer behaviour. PETDAG’s success will hinge on whether it can sustain margins and improve efficiency while navigating the shift from fossil fuels to green mobility.

On a valuation basis, the stock is trading near its estimated intrinsic value, offering a limited margin of safety under conservative assumptions. 

Investment thesis

PETDAG presents a compelling case as a high-quality, resilient downstream energy player with a strong track record of profitability and capital efficiency. It consistently ranks among the top regional peers in return on capital and EBIT margin, supported by disciplined operations and a stable business model. 

While the energy transition and EV adoption pose long-term risks, PETDAG is actively repositioning through investments in digitalisation, sustainability, and new mobility infrastructure. But at the current valuation, it offers limited upside for value investors

Case Notes An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions.  It defines your reasoning. A clear thesis encourages disciplined decision-making. It helps assess risks. It provides a benchmark to evaluate whether the investment is performing as expected. An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Case Notes

An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions. 

• It defines your reasoning.

• A clear thesis encourages disciplined decision-making.

• It helps assess risks.

• It provides a benchmark to evaluate whether the investment is performing as expected.

An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Case Notes

An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions. 

• It defines your reasoning.

• A clear thesis encourages disciplined decision-making.

• It helps assess risks.

• It provides a benchmark to evaluate whether the investment is performing as expected.

An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Case Notes

An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions. 

• It defines your reasoning.

• A clear thesis encourages disciplined decision-making.

• It helps assess risks.

• It provides a benchmark to evaluate whether the investment is performing as expected.

An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

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If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from Amazon, Kobo and Google Play.

PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. 

Disclaimer & Disclosure

I am not an investment adviser, security analyst, or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

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