Investment Highlights

• We maintain our BUY call on Petronas Gas (PGas) with a lowered sum-of-parts-based (SOP) fair value of RM20.35/share (from an earlier 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 reduced FY21F-FY23F earnings by 4%-5% on higher operating cost assumptions as the group’s 1HFY21 core net profit of RM993mil (excluding unrealised forex loss of RM38mil mainly from the Sungai Udang regasification terminal’s [RGT] US$ debt) was slightly below our and consensus’ expectations, accounting for 48%-49% of FY21F earnings. As a comparison, 1H accounted for 51%–55% of the respective FY18-20 core earnings.

• The group also declared a second interim dividend 16 sen (flat QoQ), translating to a conservative payout ratio of 66%. 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%, similar to FY20.

• 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 slight net cash position currently. This could mean special dividends which could potentially raise our FY21F-FY22F DPS by 53% to RM1.94/share, implying an eye-watering yield of 12%. Nevertheless, we caution that these estimates could be moderated by new investment plans, depending on the scale and financing structure.

• PGas’ 1HFY21 core net profit slid by 5% YoY on reduced operation & maintenance (O&M) revenue for the transportation segment given the lower operating days during the period together with higher maintenance costs.

• QoQ, the group’s 2QFY21 revenue increased by 3% to RM1.4bil, driven by higher utilities prices. However, 2QFY21 EBITDA margin fell 9%-point QoQ to 62% due to higher costs from internal gas consumption, fuel gas and maintenance costs amid the Covid-19 movement restrictions. Together with by higher effective tax rate for the group’s 60%-owned Kimanis power plant, PGas’ 2QFY21 core net profit dropped by 21% to RM439mil.

• The stock currently trades at an attractive FY21F PE of 16x, below its 3-year average of 18x together with highly compelling dividend yields of 8% which could potentially be even higher if management maintains its capital optimisation strategy.

Source: AmInvest Research - 23 Aug 2021