Investment Highlights

• We maintain BUY on Petronas Gas (PGas) with a new sum-of parts-based (SOP) fair value of RM19.13/share (vs. RM20.05/share previously). We have reduced our fair value for PGas due to lower tariff assumptions. Our new fair value for PGas implies a FY23F PE of 21x, 17% above its 5-year average of 18x.

• Our FV also reflects a 3% premium for our ESG rating of 4- stars (Exhibit 4) premised on the group’s strategy to achieve net zero carbon emissions by 2050F.

• Last Friday, Economy Minister Rafizi Ramli announced that the cabinet has agreed to reduce the basic average tariffs for the use of PGas’ facilities for the second regulatory period (RP2) starting from 1 Jan 2023 to 31 Dec 2025.

• Hence, we tweak PGas’ FY23F/FY24F net earnings downwards by 2%/3% respectively to reflect the lower tariff for the group’s Peninsular Gas Utilisation (PGU) pipeline and regasification terminal Pengerang (RGTP). However, we maintain the group’s FY22E net profit as the tariff reduction will only be effective from FY23F onwards.

• According to the minister, the base daily tariff for PGas’ PGU pipeline will be lowered by 5.8% to RM1.063 per gigajoule (GJ), from RM1.129/GJ currently. In addition, the base daily tariff for the group’s 65%-owned RGTP will also be reduced by 9.2% to RM3.165/GJ from RM3.485/GJ currently.

• On a positive note, the cabinet has decided to keep the base daily tariff for the group’s regasification terminal Sungai Udang at RM3.455/GJ.

• Although the tariff reduction would result in lower earnings in RP2 (assuming volume remains relatively unchanged), we expect the earnings impact to be minimal as contribution from the other segments are still resilient. The PGU pipeline and RGTP collectively contribute 35-40% to FY23F group operating profit, based on our back-of-envelope calculations.

• Also, it remains to be seen if a recovery mechanism will be proposed to compensate for the tariff reduction. Recall that the gas transportation and regasification segments are governed under the revenue-cap mechanism of the Incentive-based Regulation (IBR). The IBR framework ensures that the annual revenue requirements can be achieved.

• Despite the smaller earnings growth from the lower gas transportation and regasification tariffs, we believe that PGas would be able to maintain its dividend payout ratio and capex plans. This is due to the group’s strong cash-flow-generating ability.

• The stock currently trades at an attractive FY23F PE of 18x, below the pre-FY20 peak of more than 20x.

Source: AmInvest Research - 27 Dec 2022