Investment Highlights

• We maintain BUY on Petronas Gas (PGas) with an unchanged  sum-of-parts-based (SOP) fair value of RM19.39/share. Our FV  also reflects a 3% premium for our unchanged ESG rating of 4  stars (Exhibit 6) premised on the group’s strategy to achieve  net zero carbon emissions by 2050F. 

• Our Fair Value Implies a FY23F PE of 21x, 1 Standard Deviation  Above Its 5-year Average.

• We maintain FY23F-FY25F earnings as PGas’ 1QFY23 core net  profit (CNP) of RM422mil (excluding RM2.5mil unrealised forex  gains) came in within expectations, accounting for 22%-23% of  our FY23F earnings and consensus estimates. The group  declared a first interim dividend of 16 sen (flat YoY), which  translates to a payout ratio of 75%.

• YoY, 1QFY23 revenue grew by 15% to RM1.7bil, mainly driven  by higher product prices within the utilities segment. We  reckon that the higher product prices were a result of  favourable terms from recent contract renewals which allow a  more balanced cost pass-through of higher fuel gas costs. 

• Despite the higher revenue, 1QFY23 CNP was flattish, offset by  higher depreciation charges as well as internal gas  consumption (IGC) costs amid higher gas prices, which is  partially mitigated by a lower effective tax rate by 6%-points and higher interest income. 

• QoQ, PGas’ 1QFY23 revenue rose marginally by 3% on the  back of higher sales growth from the utilities segment  following recent contract renewals which embedded higher  tariffs to alleviate increased fuel gas costs. This more than  offset the declines in revenue from regulated gas  transportation by 2.4% QoQ and regasification by 6.4% QoQ  following the downward revision in regulatory period 2 (RP2)  tariffs for Peninsular Gas Utilisation (PGU) and Regasification  Terminal Pengerang (RGTP). 

• In addition to the higher revenue, 1QFY23 CNP jumped by a  larger 16.3% QoQ, underpinned by lower operating expenses,  mainly IGC costs and maintenance expenses. 

• Notably, the gas transportation division recorded sharply  higher EBIT of RM123mil (+4.0x QoQ) in 1QFY23 due to a  rebound in EBIT margins to 43% from 11% in 4QFY22, mainly  from lower IGC expenses. We understand that the QoQ decline  in the segment’s operating expenses in 1QFY23 was partially  due to a high-base effect as 4QFY22 posted extraordinarily  high IGC from one-off reconciliation of previously unrecorded  gas costs following the installation of new equipment.

• However, regasification EBIT declined by 23% QoQ in tandem with lower revenue and higher IGC expenses. This  slightly negated the better earnings from the gas transportation and utilities segments.

• Throughput services (gas transportation and gas processing) continued to be the largest earnings contributor  at 60% of FY22 group EBIT, followed by regasification (29%) and utilities (10%).

• We Attended An Analyst Briefing Yesterday With the Following Key Takeaways:

  • The group highlighted that 2 ongoing expansion projects, namely the Terengganu Crude Oil Terminal Off-Gas Rerouting project and the new gas compressor station in Kluang have experienced slight delays in progress attributable to supply chain disruptions. Nevertheless, management expects minimal financial impact from the delayed completion of both projects.

  • The group also maintains its 2023 capital expenditure target of RM1.0-1.2bil. We understand that it is looking 
    to further explore opportunities in 4 key growth areas which are (i) LNG storage, (ii) power generation 
    capacity, (iii) integrated utilities, as well as carbon capture and storage space.

  • Meanwhile, the ongoing process to renew the third Gas Processing Agreement with parent company 
    Petronas group is right on track and expected to be concluded by the end of 2023. Management assured that 
    they are negotiating for favorable terms to ensure fair returns on assets amid a challenging operating 
    environment.

  • Within the regasification segment, we note that the group has entered into a settlement agreement with 
    counterparties for Regasification Terminal Sungai Udang, which allows PGas to mitigate the majority of 
    future financial impact induced by forex volatility

• We remain optimistic on the group’s near-term outlook, underpinned by resilient earnings from regulated segments (gas transportation and regasification) with guaranteed income coupled with imminent growth in non-regulated gas processing and utilities segments secured by long-term contracts and resilient demand from customers. 
   
• The stock currently trades at an attractive FY23F PE of 18x, below the 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 was further optimised from the current net cash position

Source: AmInvest Research - 23 May 2023