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.

• We maintain our earnings forecasts following the recent analyst briefing. These are the salient highlights:

• Expected to register a steady FY21F earnings growth of 3%, underpinned by the Energy Commission’s tariffs under the first regulatory period for FY20–FY22F, PGas has not experienced any significant impact from Covid-19 demand contraction nor operational disruption from movement restrictions.

• Instead, movement restrictions have partly contributed to lower repair & maintenance (R&M) costs. Together with lower internal gas consumption and lower fuel gas prices, the group’s 1QFY21 operating costs fell 26% YoY to RM388mil. Management indicated that R&M could have accounted for 15%–20% of the opex reduction under the company’s cost optimisation programmes.

• PGas will be spending RM100mil to relocate a compressor in the debottlenecking Southern pipeline project, which will lead to an incremental capacity increase of 150mmscfd for the gas transportation segment. Enabling third parties to supply gas to the industrial areas in Johor, this project will be completed by July 2022.

• Including the RM541mil to be spent to build a new lateral gas pipeline over 42km from the existing Peninsular Gas Utilisation II to the proposed Tadmax Indah combined cycle gas-fired power plant in Pulau Indah, Selangor, the group expects FY21F capex to reach RM1.2bil–RM1.3bil, and subsequently taper slightly in FY22F. Recall that the Pulau Indah power plant, being developed by Worldwide Company (75%) and Korea Electric Power Corporation (25%), will have a capacity of 1,200MW. Expected to be completed and commissioned in 1Q2023 under the regulatory period (RP) 2, this pipeline will supply 137 million standard cubic feet of natural gas to the industrial area.

• Given the group’s huge fixed asset base of RM13bil, we estimate marginal impact from the Southern debottlenecking project and Pulau Indah pipeline to PGas’ SOP and earnings assuming a project IRR of 7%. Hence, we maintain our FY23F gas transportation which assumes a 15% drop under the incentive-based RP2.

• The group is eyeing integrated facilities in industrial parks in northern and southern Peninsular Malaysia given its established track record in co-generation facilities in Terengganu as coal-fired plants with heavy carbon footprints may be replaced by less environmentally damaging gas facilities at the end of their power purchase agreements.

Source: AmInvest Research - 27 May 2021