Investment Highlights

• We maintain BUY on Petronas Gas (PGas) with a slightly higher sum-of-parts-based (SOP) fair value of RM19.39/share (from RM19.13/share previously) upon rolling forward the valuation base year. Our fair value also reflects a 3% premium for our ESG rating of 4 stars (Exhibit 6).

• Our fair value implies a FY23F PE of 21x, 1 standard deviation above its 5-year average.

• We maintain FY23F-FY24F earnings premised on the robust recurring income from its assets which are mostly backed by long-term contracts. Subsequently, we also introduce FY25F earnings with a 1% flattish growth anchored by stable demand for gas and utilities.

• PGas’ FY22 core net profit (CNP) of RM1,713mil (excluding unrealised forex loss of RM68mi) came in within expectations, coming in 2% below our forecasts and 3% of street’s. The group declared a fourth interim dividend of 22 sen (flat YoY), bringing FY22 dividend per share to 72 sen. This also translates to a payout ratio of 87%, in line with our FY22FFY24F assumptions.

• YoY, the group’s FY22 revenue rose by 9% to RM6.2bil largely due to higher sales growth from the utilities segment. Notwithstanding the higher revenue, CNP fell 16% YoY, dragged by margin contractions across all operating segments. We highlight that the lower profit margins mainly stemmed from heightened fuel gas and internal gas consumption (IGC) expenses, particularly within the gas transportation as well as the utilities segments.

• For FY22 EBIT, gas transportation declined 19% YoY and utilities by 49% YoY on increased fuel gas and internal gas consumption expenses amid elevated natural gas prices.

• QoQ, PGas’ 4QFY22 CNP slid 25% to RM363mil (excluding RM50mil unrealised forex gains) despite a 4% revenue growth to RM1.6bil as a result of weaker contributions from throughput services and utilities segments. In particular, the gas transportation division unexpectedly posted lower EBIT of RM31mil (-82% QoQ) in 4QFY22 due to a sharp decline in EBIT margins to 11% from 59% in 3QFY22, mainly due to higher IGC expenses.

• On the other hand, the group also recorded a QoQ decrease in EBIT of 14% for gas processing and 37% for utilities due to lower profit margins. On a positive note, the regasification segment’s EBIT climbed 11% QoQ despite a flat revenue growth, mainly supported by lower operating expenses.

• The throughput services segment (gas transportation and gas processing) remains the largest earnings contributor at 62% of FY22 group EBIT, followed by regasification (32%) and utilities (6%).

• We attended an analyst briefing yesterday with the following key takeaways:
  • Management revealed that the higher IGC incurred by gas transportation division in 4QFY22 was in line with the 25% QoQ increase in Malaysia Reference Price (MRP) to RM50 per metric million British thermal unit (mmbtu) from RM40/mmbtu in 3QFY22.
  • However, management also recapitulate that the introduction of cost pass-through component in the regulatory period 2 (RP2) will mitigate any negative impacts of higher gas price in the 3-year period from 2023 to 2025.
  • In addition, we understand that the group started charging Tariff C to its clients for the usage of PGU II Sector 3 Project Compressor Relocation pipeline since the beginning of 2023. This is despite the absence of gas delivery, given that tariffs are charged based on reserved capacity instead of gas delivery volume.
  • The group also reached the final investment decision to construct a 52 megawatt power plant and associated facilities in Sipitang Oil and Gas Industrial Park. The power plant is dedicated for Petronas’ upcoming floating liquified natural gas (ZLNG) project in Sabah for 20 years.
  • We note that PGas has earlier awarded construction works worth RM230mil to local contractor Kejuruteraan Asastera (KAB). Both parties also entered into a joint venture agreement to co-own the power plant, with PGas taking up a larger 90% stake. The construction works for the plant is expected to commence in 2QCY23 and targeted to commence operation in 1QCY26.
  • Assuming a total capex of RM250mil, project IRR of 9% (similar to Kimanis power plant) and a 15% EBIT margin, we estimate the new power plant to slightly add 1.2% to FY26F earnings and 1% to SOP given the group’s huge asset base.
• We remain optimistic on the group’s near term outlook in light of resilient earnings from its regulated segments (gas transportation and regasification) with guaranteed income coupled with the imminent improvement in nonregulated gas processing and utilities segments. We also anticipate a gradual earnings recovery in the utilities segment from recent contract renewals that help to partly mitigate higher fuel gas costs.

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

Source: AmInvest Research - 17 Feb 2023