Investment Highlights

• We maintain our BUY call on Petronas Gas (PGas) with an unchanged sum-of-parts-based (SOP) fair value of RM21.30/share, which implies an FY20F PE of 20x.

• We maintain FY20F–FY22F earnings, which are 13%–17% above consensus, following the analyst briefing today. These are the salient highlights:

• Management indicated that the group is looking at optimising its capital structure to be comparable with other infrastructure companies, which under the Energy Commission’s guidelines, could imply a debt-to-equity ratio of 55%. Given PGas’ current net debt balance of RM237mil, a gradual increase in net gearing levels to 50% over the next 3 years will mean that the group’s FY21F–FY22F DPS could rise by 2.4x. As such, we believe that the group’s 2QFY20 special dividend of 50 sen is only the start of a rousing re-rating catalyst for the stock. For now, our dividend forecasts are maintained pending the group’s performance over the next quarter.

• The group’s FY20F–FY21F capital spending is expected to be 17% lower at RM1bil compared to RM1.2bil in FY19. While capex reached only RM460mil in 1HFY20 due to the Covid 19 movement control order (MCO), management expects an increase of 17% in the 2HFY20 with the normalisation of activities. Likewise, maintenance costs are expected to increase after halving QoQ in 2QFY20.

• Associate contribution surged by 29% QoQ to RM58mil in 2QFY20 due to increased nitrogen demand for the Pengerang air separation unit, spurred by the fire incident in March this year.

• Demand for utilities fell YoY in 1HFY20 with electricity decreasing by 58%, steam 51% and industrial gases 39% due to lower offtake by Tenaga Nasional which has shifted to a lower cost fuel supply and dampened demand from customers during the MCO. While sales to Tenaga remain low, management indicated that demand for other utilities has begun to recover.

• The group expects mild revenue streams with the LNG bunkering and trucking operations in Pengerang to commence in 2H20 while a new nitrogen unit will be available in 2021. As with a recent export terminal for LPG gas processing operations in Terengganu, these investments will be slightly accretive to the group

Source: AmInvest Research - 21 Aug 2020