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 FY21F PE of 20x, pending an analyst briefing tomorow.
• We maintain our earnings forecasts as the group’s 9MFY20 core net profit of RM1,545mil (excluding unrealised forex loss of RM39mil mainly from the Sungai Udang regasification terminal’s [RGT] USD debt) was in line with our expectations but slightly above consensus.
• Assuming a flat QoQ 4QFY20F will translate to net profit which falls within 5% of our FY20F projection. However, our FY20F– FY22F earnings are 8%–11% above street’s.
• The group declared a third interim dividend of 18 sen following its special dividend of 50 sen in addition to the second interim dividend of 16 sen to bring a total 9MFY20 DPS of 100 sen. This translates to a payout ratio of 131%.
• Assuming that the group will continue paying dividends as usual in 4QFY20, we have raised FY20F DPS by 20% to 118 sen, translating to a payout ratio of 111% and highly attractive yield of 7%. For FY21F–FY24F onwards, we have raised our dividend payout assumption to 100% from 75%–78% as management has indicated plans to proceed with an optimal capital strategy to be comparable with other infrastructure companies.
• Currently, PGas is net cash vs. other peers’ debt-to-equity ratio of 55%. As such, we believe that the upgrades to PGas’ dividend payout has only just begun, which will re-catalyse the stock’s rerating appeal.
• On a YoY comparison, the group’s 9MFY200 revenue rose by 3% to RM4.2bil from higher performance incentive from the gas processing plants and increased regasification tariffs under the new regulatory period 1. This was partly offset by the transportation segment as the optimised replacement cost valuation being employed currently will be phased out and replaced with historical cost over these transitional periods. Together with a 9% reduction in depreciation and 6% decrease in interest rate, these drive 9MFY20 net profit up by 9% YoY.
• QoQ, the group’s 3QFY20 core net profit slid to RM498mil (excluding unrealised forex gain of RM93mil) on a flattish revenue of RM1.4bil, dented by the halving of associate contribution from 60%-owned Kimanis Power’s scheduled shutdown and a 4ppt increase in effective tax rate to 24%.
• The stock currently trades at an attractive FY21F PE of 15x, 21% below its 3-year average of 19x together with a highly compelling dividend yield. This is unjustified as FY23F earnings decline of 5% from the continuation of the Energy Commission’s incentivebased regulatory framework is unlikely to significantly reduce the group’s dividend trend.

Source: AmInvest Research - 19 Nov 2020