Investment Highlights

• We maintain BUY on Petronas Gas (PGas) with an unchanged sum-of-parts-based (SOP) fair value of RM20.05/share, which reflects a 3% premium for our ESG rating of 4 stars (Exhibit 6). This implies a FY23F PE of 22x, 1 standard deviation above its 5-year average.

• The group’s 9MFY22 core net profit (CNP) of RM1,351mil (excluding unrealised forex loss of RM118mi) came in slightly above our expectation at 79% of FY22F net profit but in line with consensus at 77% of street’s estimates.

• As a comparison, 9M typically accounted for 75%–78% of the FY19–21 core profit. PGas also declared a third interim dividend of 18 sen (flat YoY) which translates to a 9MFY22 payout ratio of 80%, in line with our FY22F-FY24F assumptions.

• Pending an analyst briefing later today, we marginally raise FY22F earnings by 3% after penciling in higher profit margins for the regasification and utilities segments. We maintain FY23F-24F earnings on the back of stable demand for gas and utilities coupled with a normalised operating environment.

• The group’s 9MFY22 CNP fell 15% YoY notwithstanding a 9% increase in revenue to RM4.5bil, weighed down by weaker performance across all operating segments and higher effective tax rate due to the prosperity tax. Particularly, the utilities division saw its 9MFY22 EBIT declining by 51% YoY as a result of tighter margins arising from higher fuel gas costs.

• For 9MFY22 EBIT, the gas transportation slid 8% YoY and regasification by 10% YoY on higher operating costs, mainly from increased internal gas consumption amid fuel gas price.

• QoQ, the PGas’ 3QFY22 CNP rose by 9% to RM485mil (excluding RM59mil unrealised forex losses) in tandem with a 3% revenue growth to RM1.56bil as the earnings recovery in the utilities division more than offset marginally weaker contributions in other segments. This came from earlier renewals of several long-term utilities’ contracts, which helped in partly mitigating higher fuel gas costs.

• On the other hand, the gas transportation and regasification segments continued to be plagued by higher internal gas consumption. Nevertheless, we reiterate our expectation that new tariffs under the regulatory period 2 (to be finalised soon by the end of 2022) will be able to fully compensate for the higher operating costs within the 2 regulated segments.

• The throughput services segment (gas transportation and gas processing) remain the primary earnings contributor at 63% of 3QFY22 group EBIT, followed by regasification (29%) and utilities (8%).

• Going forward, the group’s near-to-medium earnings outlook remains promising as the majority of its earnings are backed by long-term contracts.

• The group also has a number of expansion projects in the pipeline including gas pipeline extensions and new metering stations in Peninsular Malaysia, which provide sustainable growth prospects.

• Also recall that PGas intends to optimise its capital structure over the next 3 years by gradually increasing its net gearing ratio from 3% currently to the Energy Commission’s (EC) guided optimal ratio of 55%, a level which is comparable to the other infrastructure companies. To comply with EC’s recommended optimal gearing ratio which would lead to lower WACC, PGas could increase its debt financing for future capex, as well as distribute cash to its shareholders via higher dividends.

• Hence, we do not discount the possibility of special dividends that could potentially raise our FY22F–FY24F DPS by 53% to RM1.94/share, implying an eye-watering yield of 11%. Nevertheless, we caution that the likelihood of special dividends could be moderated by higher-than-expected capex as the company channels capital to fund new investments or acquisition propositions.

• 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 the group’s capital structure has been further optimised.

Source: AmInvest Research - 15 Nov 2022