Investment Highlights

• We maintain our BUY call on Petronas Gas (PGas) with an unchanged sum-of-parts-based (SOP) fair value of RM20.20, which reflects a premium of 3% from our ESG rating of 4 stars. This also implies an FY21F PE of 20x.

• Our forecasts are maintained following an analyst briefing yesterday, which included these salient highlights:
  • Management reaffirmed the group’s optimal gearing strategy to attain a debt-to-equity ratio comparable with other utilities/infrastructural companies’ 55% over the next 3 years from its net gearing position of only 3% currently.
  • Notwithstanding that the 4 interim dividends declared so far have only reached 82 sen in FY21 (a 35% drop from 127 sen in FY20), management indicated no plans for further distribution for the last financial year at this stage pending the board’s deliberations on prospective investments.
  • Even so, management’s balance sheet optimisation strategy implies an escalation in special dividends going forward which could potentially double our FY22F–FY24F DPS to an eye-watering 10% yield. Nevertheless, we caution that these estimates could be moderated by new investment plans, depending on the scale and financing structure.
  • Maintenance activities are expected to be slightly higher this year. However, PGas’ capex is expected to rise by 26% to RM1.3bil in FY22F from RM1bil last year, and slightly higher to RM1.3–RM1.4bil in FY23F before tapering off in FY24F.
  • While unable to quantify the FY22F prosperity tax impact at this stage, management expects the regassification units, which enjoy pioneer tax status, to partly mitigate the likely higher tax rate. Recall that companies will be taxed on profits in excess of RM100mil at 33% this year. For now, we maintain FY22F’s effective tax rate of 25% vs. 20% in FY21.
  • Management is evaluating clients’ expressions of interest to take up capacity for a third liquefied natural gas (LNG) storage tank in Pengerang. Recall that PGas’ 65%-owned Pengerang LNG (Two) (PLNG2) has invited prospective contractors last year to submit non-binding expressions of interest to utilise a proposed new tank with a preferred capacity of 160K cubic metres on a 20-year commercial lease agreement. Dialog has a 25% equity stake in PLNG2 while the Johor state government holds 10%. The new storage tank, which can be upsized to 260K cubic metres, is expected to be completed by 4Q2025 at the earliest. Based on PLNG2's preferred tank size and contract term of 20 years, the indicative annual fee would be US$24.1mil for third-party usage.
  • PLNG2's existing facilities include 2 LNG storage tanks, which commenced operations on Nov 2017 with a capacity of 400K cubic metres, regasification throughput of 490mil cubic feet per day and other ancillary services such as reloading, gassing up and cooling down.
  • Based on the PLNG2's capex of RM2.7bil for its current facilities, we estimate that an additional 160K LNG tank could cost RM1bil given the high current raw material costs albeit without a regasification component. Assuming operating costs at 10% of revenue, the project IRR translates to a minimal 5.5%, a negligible NPV accretion to the group. Pending further details, we are neutral on this potential capacity expansion.
  • PGas’ RM100mil project to relocate 2 compressors for the debottlenecking Southern pipeline project remains on track for completion by June 2022. This development 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 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 revenue which assumes a 15% drop under the incentivebased RP2. The next transport tariff submission is due in 1QFY22 followed by discussions with the Energy Commission until December 2022.
• The stock currently trades at an attractive FY23F PE of 18x, below pre-FY20 peak of over 20x. This is supported by compelling dividend yields of 5% which could potentially be even higher if management adheres to its capital optimisation strategy.

Source: AmInvest Research - 23 Feb 2022