Investment Highlights

• We maintain BUY on Petronas Gas (PGas) with an unchanged sum-of-parts-based fair value of RM19.13/share, which implies an FY23F PE of 21x, 17% above its 5-year average of 18x. Our FV also reflects a 3% premium for our unchanged ESG rating of 4 stars (Exhibit 5) premised on the group’s strategy to achieve net zero carbon emissions by 2050F.

• We keep our forecasts unchanged in view of the resilient earnings base from all its assets that are mostly backed by long-term agreements.

• To recap, the daily base tariff for the Peninsular Gas Utilisation (PGU) pipeline was lowered by 5.8% to RM1.063 per gigajoule (GJ) from RM1.129/GJ previously. In addition, the daily base tariff for the group’s 65%-owned regasification terminal Pengerang (RGTP) was also reduced by 9.2% to RM3.165/GJ from RM3.485/GJ previously. Meanwhile, the daily base tariff for the group’s regasification terminal Sungai Udang (RGTSU) was maintained at RM3.455/GJ.

• We attended an analyst briefing hosted by the group to share further details on the Regulatory Period 2 (RP2) tariffs last Friday and here are the key takeaways:
  • There is a downward adjustment of RM0.002/GJ to PGU tariff in 2023 as part of annual adjustments to account for additional revenue received in 2022. Effectively, the daily base PGU tariff from 1 January 2023 to 31 December 2023 will be RM1.061/GJ. The base rates for 2024 and 2025 remain the same at RM1.063/GJ.
  • Management explained that the lower tariffs for all 3 regulated assets in RP2 are mainly due to lower weighted average cost of capital (WACC), despite being partially offset by the higher regulated asset base (RAB). However, there was limited disclosure on the exact changes to WACC and RAB.
  • In particular, the higher RAB from PGU stems from substantially higher capex, which consists of maintenance and growth capex, approved by the Energy Commission (EC). Meanwhile, the EC has also approved a higher capex for RGTSU and PGTP, mainly for maintenance purposes in order to preserve asset integrity, reliability and safety.
  • We note that a total capex of RM2bil has been earmarked for the 3 regulated assets over the 3 year-period in RP2. This, in turn, more than mitigates the negative impact from the transition of asset valuation methodology from depreciated replacement cost to net book value, leading to a higher RAB in RP2.
  • We also noted a silver lining, which is the introduction of several new initiatives to cushion the negative impact of lower tariffs, including:
    i. Yearly adjustment to annual revenue requirement (ARR), which allows cost pass-through of higher-thanprojected internal gas consumption (IGC) due to volatile gas prices. This means that the group will be able to recover any operating expense overruns from higher IGC via upward adjustment of tariffs in subsequent years.
    ii. Yearly adjustment to ARR which allows cost pass-through of foreign currency (forex) movements via adjustments to RAB. Principally, the group will be allowed to recover forex losses by adjusting the RAB value with a % change factor equivalent to the % forex variation in the subsequent year. This will sequentially result in a higher allowed return (the outcome of WACC multiplied with a higher RAB) and therefore higher tariffs immediately in the next year. The adjustment will help mitigate potential unrealised forex losses from lease liabilities of RGTSU’s floating storage units and RGTP’s jetty in the event of unfavorable currency movements.
    iii. The introduction of Tariff C that comes with a surcharge of RM0.553/GJ, imposed on the delivery of gas via PGU II Sector 3 Project Compressor Relocation (SCORE) pipeline to Singapore. Hence, any delivery of gas via SCORE will be effectively charged RM1.616/GJ (base rate of RM1.061/GJ plus RM0.553/GJ) throughout RP2, except for RM1.0614/GJ in 2023 due to the downward adjustment of RM0.002/GJ.
  • We understand that the SCORE pipeline, which is equipped with a capacity of 200 million standard cubic feet per day (mmscfd), has been commissioned since 3QFY22 and will commence the delivery of gas to Singapore buyers soon. Based on our estimates, the introduction of Tariff C would add an additional contribution of RM21mil per annum or 1.2% to PGas’s FY23-FY25F earnings.
  • Management also highlighted that the capacity for all 3 regulated segments has been fully booked currently, thus assuring stable earnings delivery in RP2. Recall that the reserved capacity for the 3 assets are 2,550 mmscfd for PGU, 500 mmscfd for RGTSU and 490 mmscfd for RGTP.
  • The company also maintains its capex guidance of RM1bil per annum (for regulated and non-regulated assets) in the near future with a target to spend a majority of the investment expenditure on PGU.
• All in, we are more upbeat on the group’s future prospects from the introduction of cost pass-through for IGC and forex as well as the Tariff C, which should largely cushion the negative impact from lower tariffs. Furthermore, we also foresee better earnings outlook in the utilities segment, anchored by renewals of longterm contracts that help to partly mitigate higher fuel gas costs.

• The stock currently trades at an attractive FY23F PE of 18x, below the pre-FY20 peak of more than 20x, and currently offers a good dividend yield of 5%-6%.

Source: AmInvest Research - 30 Jan 2023