Investment Highlights

• We maintain our BUY call on Petronas Gas (PGas) with unchanged forecasts and sum-of-parts-based (SOP) fair value of RM21.30/share, based on the group’s gas processing and transportation WACC of 7%, market return of 8% and risk-free rate of 2.6%. This implies an FY20F PE of 20x.
• PGas’ 65%-owned Pengerang LNG (Two) Sdn Bhd (PLNG 2) has issued RM1.7bil Islamic medium term notes, as part of its programme to issue up to RM3bil sukuk financing with a 30- year tenure. This will be issued over 20 tranches which will bear an annual distribution rate of 2%–3.7%.
• With an indicative rating of AAA by Malaysian Rating Corporation, the proceeds will be to fully repay outstanding USD shareholders’ loan. Hence, this arrangement will not affect the group’s current net cash position of RM237mil and gross debt of RM4bil as at 30 June 2020.
• While the effective interest rate may be higher than the USD debt, this arrangement will reduce the group’s exposure to forex risk and maintain PGas’ Islamic investment profile. Hence, this issuance is unlikely to have any substantive impact on the group’s forward earnings.
• The rest of the sukuk programme is to redeem redeemable preference shares, working capital, capex and prepayment of the jetty usage. Recall that the other shareholders in PLNG 2 are Dialog Group with a 25% equity stake and the Johor state government 10%.
• We expect the group to continue raising additional debt as management has indicated PGas' intention to optimise 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' shareholders' funds of RM13bil currently and assuming a gradual increase in net gearing levels to 50% over the next 3 years, this 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 coming quarter.
• The stock currently trades at an attractive FY21F PE of 15x, 21% below its 3-year average of 19x. This is unjustified as FY23F earnings decline of 5% from the continuation of the Energy Commission's incentive-based regulatory framework is unlikely to significantly reduce the group's dividend payout ratio. If the group were to proceed with its optimal capital strategy, we estimate that FY21F dividend yield of 5% currently could surge to an eye-watering 12%.

Source: AmInvest Research - 22 Oct 2020