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 reflects a premium of 3% from our ESG rating of 4 stars. This also implies an FY21F PE of 20x.

• Pending an analyst briefing later today, we have slightly tweaked our forecasts as the group’s 1QFY21 core net profit of RM555mil (excluding unrealised forex loss of RM38mil mainly from the Sungai Udang regasification terminal’s [RGT] USD debt) was largely in line with our and consensus’ expectations, accounting for 27%–28% of FY21F earnings. As a comparison, 1Q accounted for 24%–25% of the respective FY18-20 core earnings.

• The group also declared a first interim dividend 16 sen (flat YoY), translating to a conservative payout ratio of 61%.

• Even so, we retain our FY21F–FY22F DPS at RM1.27/share on expectations that the group’s optimal balance sheet strategy could mean a payout ratio of over 100%.

• Recall that PGas intends to proceed with a debt-to-equity ratio comparable with other infrastructure companies’ 55% over the next 3 years from its negligible net debt position of RM127mil.

• While our FY21F–FY22F dividends conservatively assume a payout ratio of 100%, we estimate that management’s aims to substantively escalate DPS by up to 22% to RM1.55/share, implying an eye-watering yield of 10%. Nevertheless, we caution that these estimates could be affected by new investment plans, depending on the scale and financing structure.

• QoQ, the group’s 1QFY21 core net profit rose 26% due to higher lumpy contribution from the group’s 60%-owned Kimanis power plant. 1QFY21 EBIT was flattish QoQ as lower sales of utilities was offset by lower fuel costs and O&M amid the Covid-19 movement restrictions.

• YoY, 1QFY21 core net profit increased by a slight 7% on lower fuel gas costs and internal gas consumption despite revenue declining 4% on lower utilities’ product prices in tandem with the change in gas pricing and lower operation & maintenance (O&M) revenue.

• The stock currently trades at an attractive FY21F PE of 15x, 21% below its 3-year average of 19x together with highly compelling dividend yields of 8% which could potentially be even higher if management maintains its capital strategy.

Source: AmInvest Research - 25 May 2021