• 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-star 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’ 1HFY23 core net profit (CNP) of RM930mil (excluding RM20mil unrealised forex losses) came in within expectations, accounting for 50%-51% of our FY23F earnings and consensus estimates. The group declared a flat second interim dividend of 16 sen (flat YoY), which translates to 1HFY23 DPS of 32 sen and payout ratio of 70%.

• QoQ, PGas’ 2QFY23 core net profit rose 20% to RM508mil on lower fuel gas and internal gas consumption costs which drove up EBIT contributions from all business segments, especially utilities (+78%). However, 2QFY23 revenue slid 2% mainly due to a 6% decline from reduced steam and industrial gas sales for the utilities segment in tandem with lower fuel gas prices.

• 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 group is also planning 10 flagship catalyst projects involving energy efficiency, renewable energy, hydrogen, biomass energy, green mobility and carbon capture/utilisation/storage with reasonable investment returns based on infrastructural peers’ benchmarks.

• The stock currently trades at an attractive FY24F PE of 18x, below the pre-FY20 peak of over 20x. This is supported by compelling dividend yields of 5%.

Source: AmInvest Research - 28 Aug 2023