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 later today, we have slightly tweaked our forecasts as the group’s FY20 core net profit of RM1,986mil (excluding unrealised forex loss of RM24mil mainly from the Sungai Udang regasification terminal’s [RGT] USD debt) was in line with our and consensus’ expectations.

• However, the group declared a 4QFY20 dividend of 27 sen, bringing FY20 EPS to 127 sen (comprising special dividends of 55 sen). This translates to a payout ratio of 125%, which is 8% above our projection.

• Since our update on 21 August last year, we have highlighted the likelihood of higher-than-expected cash distribution given management’s intention to proceed with an optimal capital strategy to be comparable with other infrastructure companies’ debt-to-equity ratio of 55% over the next 2–3 years from its current net cash position of RM141mil.

• While our FY21F–FY22F dividends conservatively assume a payout ratio of 100%, we estimate that management’s aims could substantively escalate DPS by up to 65% to RM1.20/share, implying an eye-watering yield of 13%.

• We have also introduced FY23F EPS, which assumes a 15% decline in the gas transportation revenue due to the Energy Commission’s incentive-based regulatory tariff mechanism. This translates to a 7% decline in FY23F earnings, together with a corresponding contraction in DPS based on a payout assumption of 100%. Even so, yield remains attractive at 6%.

• YoY, FY20 revenue rose 2.5% 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 an 11% reduction in depreciation and 4% decrease in interest rate, this increased FY20 core net profit by 5% YoY.

• QoQ, the group’s 4QFY20 core net profit dropped 12% to RM441mil (excluding unrealised forex gain of RM63mil) due to lower sale of excess electricity from the utilities division and increased operating costs at the gas transportation and RGT segments together with higher repair & maintenance charges, partly deferred in the earlier quarters due to the Covid-19 movement control orders.

• The stock currently trades at an attractive FY21F PE of 16x, 18% below its 3-year average of 19x together with highly compelling dividend yield prospects.

Source: AmInvest Research - 23 Feb 2021