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.

• Our forecasts are unchanged following an analyst briefing yesterday. These are the key takeaways:

• For the finalisation of regulatory period 2 (RP2) tariff for PGas’ regulated operations, particularly the gas transportation and regasification segments (which collectively accounted for 57% of 9MFY22 EBIT), the group is still expecting the decision to be made by the Energy Commission by the end of December 2022.

• The group has also included suggestions to mitigate earnings volatility within the 2 segments caused by fluctuations in fuel gas prices and foreign exchange rates in the submitted proposal.

• For 9MFY22, total internal gas consumption (IGC) costs incurred are estimated to be equivalent to 5% of the total operating costs (RM140mil based on our back-of-envelop calculations). The group now anticipates that fuel gas cost savings from 2020-2021 will be able to make up for elevated IGC costs recorded so far this year, therefore ruling out the possibility of further cost recovery through RP2 tariffs. We have not incorporated any cost recoveries in our current forecasts.

• Meanwhile, the group is re-evaluating its project execution approach for the third liquefied natural gas (LNG) storage tank in Pengerang due to escalated project costs arising from higher construction material prices. Nevertheless, we note that it remains committed to proceed with the project, with expectations to reach final investment decision (FID) by mid-2023 (delayed from its earlier guidance of end-2022). To recap, PGas’ 65%-owned Pengerang LNG (Two) (PLNG2) has invited prospective contractors last year to submit non-binding expressions of interest to utilise a proposed new tank with a preferred capacity of 160K cubic metres on a 20-year commercial lease agreement.

• The group’s capex projects worth RM1.4bil are also gradually making headways with all projects progressing within schedule. Of these, we gather that the RM100mil Southern Peninsular Gas Utilisation project has been completed while the utilities connection to its PCC Oxyalkylates Malaysia is also reaching the project’s final stages.

• 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 - 16 Nov 2022