Investment Highlights

• We maintain BUY 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.

• We retain our forecasts as the group’s 1HFY22 core net profit (CNP) of RM866mil (excluding unrealised forex loss of RM58mi) was largely within our expectations but slightly below consensus, coming in at 49% of our FY22F earnings and 45% of street’s estimates.

• To put into perspective, 1H historically accounted for 49–53% of FY19–FY21 core earnings. PGas declared a second interim dividend of 16 sen (flat YoY) with an in-line 80% payout ratio.

• YoY, the group’s 1HFY22 CNP fell 13% despite a 9% increase in revenue due to higher internal gas consumption and increased gas prices at all core divisions coupled with a 5%- point hike in effective tax rate to 24% from the implementation of the prosperity tax. Notably, the utilities division’s EBIT dived 63% to RM54mil (vs. RM145mil in 1HFY21), attributable to tighter margins as a result of higher fuel gas costs.

• However, as guided by management, the group has renewed a majority of the expiring contracts with better commercial terms which would help to alleviate further margin deterioration from elevated fuel gas costs.

• Management also reiterated its target to finalise regulatory period 2 (RP2) tariffs for its gas transportation and regasification segments in 4QFY22. THhs will enable PGas to recover higher internal gas costs incurred previously due to higher gas prices.

• QoQ, the group’s 2QFY22 CNP rose moderately by 7% to RM447.1mil (stripping off RM51mil unrealised forex losses) in tandem with a 3% revenue growth to RM1.5bil on higher contribution across all segments. The regasification segment recorded a 3% revenue growth, backed by higher number of working days coupled with higher liquefied natural gas (LNG) reloading fee while utilities revenue climbed by 8% due to favourable impact from contract renewals as well as improved customer demand.

• The group still targets a total capex of above RM1bil (vs. its earlier guidance of RM1.4bil), in which RM500mil is earmarked for maintenance projects. It is also aiming to finalise decisions related to its third LNG storage tank in Pengerang by end-2022.

• 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 eyewatering yield of 11%. 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 - 29 Aug 2022