Investment Highlights

• We upgrade Petronas Gas (PGas) to a BUY from HOLD with a higher sum-of-parts-based (SOP) fair value of RM21.30/share (from an earlier RM17.80/share), which implies an FY20F PE of 20x. This stems from lowering the group’s gas processing and transportation WACC to 7% from 8%, with the market return lowered from 10% to 8% and risk free rate from 3% to 2.6%.
• We maintain our earnings forecasts as the group’s 1HFY20 core net profit of RM1,047mil (excluding unrealised forex loss of RM131mil mainly from the Sungai Udang regasification terminal’s [RGT] USD debt) was in line with our expectations, accounting for 50% of our FY20F earnings. As a comparison, 1H accounted for 49%–55% of FY17–19 core net profit. However, the results are above street’s FY20F earnings, which are 12% below our projections.
• The group declared a special dividend of 50 sen in addition to the second interim dividend of 16 sen, translating to a 1HFY20 payout ratio of 177%. Assuming that the group will continue paying dividends as usual in 2H20, we have raised FY20F DPS by 36% to 98 sen, translating to a payout ratio of 92% and a compelling yield of 6%. For FY21F–FY24F onwards, we have raised DPS by 10 sen which implies a payout ratio of 75%–78%.
• On a YoY comparison, the group’s 1HFY20 revenue rose by 2% to RM2.8bil as the adjustment to gas processing, LNG regasification and utility rates more than offset the 5% decrease in gas transportation earnings under the new IBR since the beginning of the year. Together with additional lease income from the Pengerang LNG regasification terminal’s jetty and a 3ppt decline in effective tax rate, this contributed to core net profit increasing by 8% YoY.
• Hence, the steady results reaffirm the decline of FY20F earnings trajectory for the gas transportation segment under the Energy Commission’s (EC) gas transportation guidelines for two 3-year regulatory periods of FY20F–FY25F. Recall that the optimised replacement cost valuation being employed currently will be phased out and replaced with historical cost over these transitional periods.
• QoQ, the group’s 2QFY20 core net profit rose marginally to RM527mil (excluding unrealised forex gain of RM21mil) on a flattish revenue of RM1.4bil. This was partly offset by a 3ppt increase in effective tax rate to 20%.
• The stock currently trades at an attractive FY21F PE of 15x, 21% below its 3-year average of 19x, and further supported by attractive FY21F dividend yields of 5%. This is unjustified as FY23F’s earnings decline of 5% from the continuation of the EC’s incentive-based regulatory framework is unlikely to significantly reduce the group’s dividend payout ratio.

Source: AmInvest Research - 21 Aug 2020