Investment Highlights

• We maintain BUY on Petronas Gas (PGas) with an unchanged sum-of-parts-based (SOP) fair value (FV) of RM19.97/share, which implies FY24F PE of 21.4x, close to 1 std dev above its 5-year average . This also reflects a 3% premium for our unchanged ESG rating of 4 stars , premised on Petronas’ strategy to achieve net zero carbon emissions by 2050F.

• PGas has approved the final investment decision (FID) for the construction of a new compressor station comprising of 2 gas compressors in Jeram, Selangor with a total investment cost of RM650mil.

• The project is expected to improve the capacity of Peninsular Gas Utilities (PGU) III pipeline which caters to gas demand in the northern region. Completion of the development is expected in 2026.

• Given PGas’s minimal net debt position of 0.9% as at 31 Dec 2023 and annual free cashflow of RM2bil, we expect the group to utilise a mix of external debt and internal funds to undertake the project.

• Assuming full commissioning of the new compressor stations by 4QFY26, a 20-year investment period, 9% project IRR, 7% WACC and a debt-to-equity ratio of 55:45, we estimate this investment to accrue a profit after tax of RM45- RM50mil per annum – a slight 3% of FY26F earnings. Hence, we maintain our FY24F-26F earnings for now.

• Overall, we are positive on the development which could further enhance earnings of the regulated gas transportation segment and strengthen the recurring income stream for PGas.

• The stock currently trades at FY24F PE of 19x, still below the pre-FY20 peak of over 20x. This is supported by attractive dividend yields of 5%-5.5% which could potentially be even higher if the group’s capital structure was further optimised from the current net cash position to the levels of utilities companies.

Source: AmInvest Research - 18 Mar 2024