• 1Q22 corporate earnings season produced mixed results with a surprise on the upside.

• We remain optimist as we foresee 1) global gas demand to stay solid, 2) economic momentum to reach or exceed pre-crisis level 3) lower-than-average natural gas inventories and therefore, higher price and 4) a rise in ESG agenda that will push energy transition towards cleaner fuel.

• Maintain OVERWEIGHT recommendation on the sector with a BUY call on Gas Malaysia (TP: RM3.38) and Petronas Gas (TP: RM18.90).

A Mixed Performance

1Q22 turnover rose by 54.8% YoY for Gas Malaysia (GMB) in tandem with higher average natural gas selling price and capacity reservations by shippers for the utilization of the Natural Gas Distribution System (“NGDS”). Petronas Gas (PetGas) turnover, on the other hand, soared by 8.8% YoY driven by higher revenue from Utilities segment thanks to higher product prices and electricity volumes. However, it was a mixed earnings performance for the sector following a 32% QoQ and 64.2% YoY jump for GMB thanks to better shipping margin as it locked in a better deal price in a newly liberalised market. For PetGas, its earnings declined by 1.3% QoQ and 19.0% YoY owing to higher fuel gas cost, which hit its utilities segment and JV company as well. The group’s bottom line was also dragged by higher effective tax rate.

Resilient Earnings Ahead

We deem both GMB and PetGas earnings to stay solid, secured by Incentive Based Regulation (IBR) and long-term contract which will ensure steady revenue streams. In the near term, we project GMB earnings to stay elevated in line with rising gas price environment where it can negotiate at a better margin spread. Hence, we revised our GMB FY22F/FY23F/FY24F earnings by 35%/32%/33% to RM351m/RM358m/RM365m consistent with an increase in shipping margin (+3% from +1.5%). No change for PetGas however.

Bright Outlook amid Volatile Gas Price

We remain sanguine on the outlook as we foresee 1) global gas demand to stay solid due to supply disruptions caused by the Russian-Ukraine conflict, 2) economic activity to revert back to pre-crisis owing to full economic reopening in highly industrialised countries such as US, EU and Japan, 3) lower-than-average natural gas inventories that will push price higher and 4) a rise in ESG agenda and therefore, demand for energy transition.

OVERWEIGHT Recommendation

We maintain our OVERWEIGHT recommendation on the sector with a BUY call on Gas Malaysia (TP: RM3.38) and Petronas Gas (TP: RM18.90). Note that we have revised our target price on both stocks after imputing a higher WACC as a result of revision in risk-free rate and terminal growth.

Source: BIMB Securities Research - 5 Jul 2022