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.
• We maintain our earnings forecasts following the analyst briefing this morning. These are the salient highlights:
  • The gas transportation segment, which accounted for 31% of PGas’ 9MFY20 operating profit, should have registered a declining operating profit from the transitioning of the regulatory base asset valuation from depreciated replacement cost to historical net book value under the incentive-based regulatory (IBR) regime. Instead, the segment posted a 12% YoY rise to RM226mil in 3QFY20.
  • This largely stemmed from lower YoY operational costs, including reduced repair and maintenance expenses. Also, the internal consumption of internal gas volume was lower than incorporated in the transportation tariff.
  • Seasonally, PGas tends to incur higher operational costs such as repair and maintenance in 4QFY20. However, management indicated that the previous cyclical trends may not be repeated given that the ongoing conditional movement control order could slow down or defer some expenditure.
  • Depreciation charges fell 6% QoQ to RM243mil in 3QFY20 due to some of the group’s assets being fully depreciated while others had extended lives from rejuvenation programmes. This is within our FY20F–FY22F projection.
  • One of the electricity generation blocks in the group’s 60%- owned Kimanis Power plant was shut down for a month, which led to PGas’ associate contribution halving QoQ to RM28mil.
  • Utilities, which accounted for 6% of the group’s 9MFY20 operating profit, recorded an 8% decline to RM46mil due to higher lumpy repair & maintenance charges.
  • Management is unable to affirm whether PGas’ elevated dividend payout ratio of 131% in 9MFY20 will be sustainable, given that the special dividend of 50 sen in 2QFY20 may not be recurring. However, if the group were to proceed with its optimal capital strategy to reach a comparable infrastructural peer’s debt-to-equity ratio of 55%, we estimate that FY21F dividend yield of 7% currently could surge to an eye-watering 12%.
• 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 IBR framework is unlikely to significantly reduce the group's dividend payout ratio.

Source: AmInvest Research - 20 Nov 2020