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.

• The Energy Commission (EC) has approved a slight reduction to PGas’ adjusted incentive-based regulation (IBR) daily tariff to RM1.128/gigajoule (GJ) from RM1.129/GJ starting 1 January 2022 to 31 December 2022 for the Peninsular Gas Utilisation (PGU) facility under the Regulatory Period 1 (RP1).

• Recall that the PGU IBR tariff adjustment is an annual process under the IBR framework to account for additional revenue received in the preceding year as compared to the approved revenue that is set by the EC at the beginning of RP1 on 1 January 2020.

• Based on PGas’ announcement of an FY22F revenue reduction of RM1.2mil on the group’s gas transportation business, we estimate that the IBR adjustment will have an insignificant earnings impact, well below 1%. Hence, we maintain our FY22F–FY24F earnings.

• Separately, we remain sanguine on management’s unchanged 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 (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 yield an eye-watering yield of 10%. Nevertheless, we caution that these estimates could be moderated by new investment plans, depending on the scale and financing structure.

• 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 - 3 Mar 2022