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% for our ESG rating of 4 stars. This also implies an FY23F PE of 22x, 1 standard deviation above its 5-year average.
   
• Pending an analyst briefing later today, we maintain our forecasts for now although the group’s 1QFY22 core net profit of RM418mil (excluding unrealised forex loss of RM8mil mainly from the Sungai Udang regasification terminal’s [RGT] USD debt) appears to be below our and consensus’ expectations, coming in 23% of our FY22F earnings and 22% of consensus.

• Over the past 5 years, 1Q accounted for a higher range of 24%–27% of FY17–FY21 core earnings. The underperformance mainly stemmed from increased fuel costs in which internal gas consumption is passed through under the incentive-based regulatory mechanism for gas transportation and regasification segments.

• This can be recovered under a revised 3-year tariff under regulatory period (RP) 2, which will commence next year. Additionally, the group is finalising several long-term utilities contracts later this year which may incorporate the higher fuel costs. The group's first interim dividend of 16 sen (flat YoY) was within expectations.

• YoY, PGas’ 1QFY22 core net profit dropped 25% despite a 9% revenue increase to RM1.5bil from higher utilities prices and electricity volume. The YoY profit decline stemmed largely from:

1. Higher Internal Consumption and Increased Prices of Gas at All Core Divisions;
2. Higher Maintenance Costs at the Regasification Division,
3. forex losses at the 60%-owned associate, Kimanis power plant, which caused associates to drop 29% YoY; and
4. 7%-point Increase in Effective Tax Rate to 25%.

• QoQ, the group’s 1QFY22 revenue slid by 3% due to lower demand for industrial gases and steam following planned maintenance activities at the facilities of utilities customers together with lower working days at the gas transportation and regasification segments. Together with forex loss-driven associate drop of 33% and a 3% point increase in effective tax rate to 25%, 1QFY22 core net profit declined 6% QoQ.

• 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 net gearing position of only 3% currently. We still think that this may yet mean special dividends which could potentially raise our FY22F–FY24F 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 or acquisition propositions.

• The stock currently trades at an attractive FY23F PE of 19x, below pre-FY20 peak of over 20x. This is supported by compelling dividend yields of 5% which could potentially be even higher if management maintains its capital optimisation plans.

Source: AmInvest Research - 20 May 2022