• We like PetGas’ defensive attributes against impact of economic uncertainty owing to its (i) long-term earnings visibility and (ii) strong free cash flow generation which offers attractive dividend yield of c.5%

• Despite uncertainty in the changes of regulatory framework ahead of RP2 2023-2025, we believe PetGas’ long-term earnings outlook remain robust as surging gas demand opens up growth opportunities in both regulated and non-regulated businesses.

• We resume our coverage on PetGas with Buy recommendation and DCF-derived TP of at RM24.10. The stock currently trades at attractive valuation of 16.8x FY23F PE which is below its 9-year -1SD forward PE.

A defensive utility company

We like PetGas for its long-term earnings visibility and strong cash flow generation from its portfolio of assets. The regulated returns that it garnersfrom regulated gas transportation (GT) and regasification (RGT) segments shield the company from the repercussion of serious economic downturn while pursuing growth in non-regulated space. Currently, income from regulated business make up c.60% of its bottomline.

PetGas to benefit from robust gas demand in the long term

According to Malaysia Gas Association (MGA), demand for natural gas in Peninsular Malaysia’s power sector is expected to more than double from 643mmscfd in 2021 to 1600mmscfd by 2039. We think this bodes well for PetGas due to (i) its ability to expand its non-regulated utilities services and (ii) potentially higher investment needed for new pipeline and/or regas terminal which would expand its regulated asset base.

Offers attractive dividend yield of c.5%

We project PetGas to sustain its earnings at c.RM1.8-2.1bn over FY22- 24F supported by uninterrupted revenue from its assets portfolio. We estimate that the company would pay 84-86 sen DPS for FY22-24F owing to its strong free cash flow generation which implies attractive dividend yield of 5.0%.

Buy call with TP of RM24.10

We resume our coverage on Petronas Gas Berhad with BUY recommendation and DCF derived TP of RM24.10 based on WACC of 7.0% terminal growth of 1.0% (regulated assets) and 2.0% (non-regulated assets). Our TP implies 25.6x FY22F P/E.

Source: BIMB Securities Research - 5 Apr 2022