Investment Highlights

• We maintain our BUY call on Petronas Gas (PGas) with an unchanged sum-of-parts-based (SOP) fair value of RM20.35/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 yesterday’s analyst briefing. These are the salient highlights:
   
  • While aiming to maintain its dividend payments, PGas management concurs with our view that these could be higher than 1HFY21 dividend of 32 sen, translating to a payout of only 66% vs. 125% in FY20, including special dividends of 55 sen.
     
  • Hence, we retain PGas’ FY21–FY22F DPS of RM1.27/share, which could potentially be raised further if the group proceeds with its capital optimisation strategy at a debt-to-equity ratio of 55%, comparable with other utility companies, over the next 3 years.
     
  • Even so, we understand that this could be moderated by the group’s plans to expand its 60%-owned 300MW gas-fired Kimanis power plant as well as investments into new integrated utilities and co-generation projects at industrial parks together with regional energy transition developments. For now, management is unable to provide any guidance on the potential fresh capex requirements.
     
  • Covid-19 movement control orders have raised 2QFY21 maintenance costs by 25%–38% QoQ from RM80mil to RM100mil–RM110mil, which management indicated could be reflected in 2HFY21. Repair & maintenance costs in FY20 were relatively constrained due to lower activities amid the stricter movement restrictions during the pandemic’s early phases.
     
  • Management reaffirmed that higher gas costs from the regassification division’s increased internal gas consumption (IGC), which partially contributed to the 37% QoQ increase in 2QFY21 group operating costs, could be recovered from revised tariffs under the second regulatory period (RP) starting in FY23F. Nevertheless, the IGC variations could continue to impact margins on a quarterly basis under the current RP.
     
  • PGas’ RM100mil project to relocate 2 compressors for the debottlenecking Southern pipeline project remains on track for completion by June 2022. Recall that this 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 under RP2.
     
  • Likewise, the RM541mil project to build a new 42km lateral gas pipeline from the existing Peninsular Gas Utilisation II to the proposed Tadmax Indah combined cycle gas-fired power plant in Pulau Indah, Selangor is also on track with progress at 7% currently for completion by March 2023.
    
    Recall that the pipeline will supply 137 million standard cubic feet of natural gas to the 1,200MW Pulau Indah power plant and industrial area under RP2.
     
  • Given the group’s huge fixed asset base of RM13bil, we estimate marginal impact to PGas’ SOP and earnings from its 2 major projects currently – Southern debottlenecking project and Pulau Indah pipeline – assuming a project IRR of 7%. Hence, we maintain our FY23F gas transportation which assumes a 15% drop under the incentive-based RP2.
     
  • With a 1HFY21 capex of RM462mil, the group still expects FY21F capex to reach RM1.2bil–RM1.3bil, and have not provided any guidance for FY22F for now pending ongoing evaluations of the group’s new investment prospects. Assuming that the group achieves its debt-to-equity target of 55% by FY23F, we estimate that the group has the financial capability to undertake projects worth up to RM6bil, half of FY21F shareholders funds, without impacting our current dividend forecasts.
     
• The stock currently trades at an attractive FY21F PE of 16x, below its 3-year average of 18x, and offers compelling dividend yields of 8%. This is unjustified as FY23F earnings decline of 7% from the continuation of the Energy Commission's incentive-based regulatory framework could still offer decent yields.

Source: AmInvest Research - 24 Aug 2021