Malaysia's top stock set to ride another year of oil turmoil

[KUALA LUMPUR] Malaysian fuel company Petronas Dagangan Bhd, the country's top-performing stock in 2015, will focus this year on managing inventories to help cut operating costs and sustain dividend payments as it anticipates continued oil market turmoil.

Its strategy to mitigate any further decline in oil prices is similar to last year, when it slashed the number of days it holds inventory for by 30 per cent, managing director Mohd Ibrahimnuddin Mohd Yunus said in a Dec 31 interview. The company operates the country's biggest network of retail stations and supplies fuel to factories, vessels and airplanes - leaving the value of its fuel inventories vulnerable to oil price drops.

"We constantly manage our inventory at an optimal level," Mr Mohd Ibrahimnuddin said at his office at the Petronas twin towers in Kuala Lumpur.

"At these levels, we were able to ride out crude oil prices that have dropped significantly." Shares of Petronas Dagangan climbed 45 per cent in 2015, the best performer on the 30-member benchmark FTSE Bursa Malaysia KLCI Index, which fell 3.9 per cent. Meanwhile, Brent crude, the benchmark for half the world's oil, capped its biggest two-year decline on record amid a global oversupply. The company's stock price dropped 4.9 per cent to 23.64 ringgit in Kuala Lumpur on Monday as the KLCI retreated the most since August.

"What they do now is, they try to enhance their margins by shortening the inventory days," said Teh Kian Yeong, an analyst at K&N Kenanga Holdings Bhd. "They try to cut costs to help their bottom line." Overseas investors pulled 19.5 billion ringgit (S$6.38 billion) from Malaysian stocks in 2015, more than double 2014 outflows, as the plunge in crude eroded the government's income and the ringgit depreciated about 19 per cent against the US dollar.

The fuel retailer's performance last year was also partly due to its policy of paying about 50 per cent of its after-tax income as dividend, which leads investors to view it as a defensive stock, Mr Mohd Ibrahimnuddin said. Its dividend yield averaged 2.63 per cent to 3.05 per cent in the three financial years through 2014, according to data compiled by Bloomberg.

The company may spend about 400 million ringgit on capital expenditure in 2016, Mr Mohd Ibrahimnuddin said. That's on the lower end of its annual spending of 400 million ringgit to 500 million ringgit in past years and reflects a cautious outlook for this year, he said. Most of the spending will be used to add 15 to 20 petrol stations its network of more than 1,000 across Malaysia, he said.

Other than oil prices, the the biggest challenge will come from the resiliency of the Malaysian economy. The World Bank in December lowered its forecast for the country's 2016 economic growth to 4.5 per cent, from an earlier outlook of 4.7 per cent.

"Our business depends on the economy," Mr Mohd Ibrahimnuddin said.

BLOOMBERG