Investment Highlights

• We maintain our BUY call on Petronas Gas (PGas) with an unchanged sum-of-parts-based (SOP) fair value of RM20.05/share, which also 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.

• PGas awarded an engineering, procurement, construction and commissioning contract worth RM92mil (<1% of market cap) via tender to a consortium of Carimin Engineering Services and I Drill Pipelines Constructions for the extension of a lateral gas pipeline to ND Paper Malaysia Sdn Bhd (ND Paper).

• The project involves the construction of a 10km lateral pipeline and metering station to supply natural gas to ND Paper’s paper-making plant in Banting Industrial City, Banting, Selangor. The project is targeted to be completed and commissioned by August 2023.

• This is an expansion of the existing gas transportation network which leverages on the Third Party Access regime in the domestic gas market. Given the group’s net cash of RM179mil as at 31 March 2022, we expect the group to internally fund this project.

• Assuming a 20-year period, 9% project internal rate of return and a 33% profit after tax margin, we estimate this investment to accrue a marginal profit after tax of RM9- 10mil per annum once the natural gas pipeline and metering station are fully commissioned in 3QFY23. Hence, we maintain our FY23F-24F earnings.

• Overall, we are positive on this contract award which augurs other similar projects in the pipeline which could further enhance earnings of the gas transportation operation and strengthen the recurring income stream for PGas.

• The stock currently trades at an attractive FY23F PE of 18x, below the pre-pandemic FY18-FY19 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 plans.

Source: AmInvest Research - 22 Jun 2022