• We reckon Petronas Gas (PetGas) near term outlook to be  neutral owing to lower base tariff in RP2 and negative effect of higher gas price environment.

• We cut our FY23F-24F earnings forecasts by 7%-11% after  incorporating a lower RP2 tariff revision in gas transportation  and regasification segments and higher operating expenses.

• Maintain our HOLD call on PetGas with a lower TP of RM15.98  (RM18.48 previously) following our earnings downgrade which  is pegged at 18.1x PER to FY23F EPS of 88.4sen.

Lower Setting of Base Tariff in Regulatory Period 2 (RP2)

This year is the start of the next RP2 for PetGas in its Gas Transportation (GT) and Regasification (RGT) segment under Regulator (Energy Commission) which has approved the IncentiveBased Regulation (IBR) tariffs commencing 1 January 2023 to 31  December 2025. However, the new approved tariff was seen to be  lower in its GT segment which stood at RM1.063/GJ/day  (RP1:RM1.129/GJ/day) and RGT Pengerang at RM3.485/GJ/day  (RP1:RM3.165/GJ/day). RGT Sungai Udang was unchanged in RP2  however or at RM3.455/GJ/day. We opine the RP2 tariffs to  translate into lower GT and RGT business segment revenues in  FY23-FY25F though offset by a new separate tariff in GT  (RM0.553/GJ/day) which is for delivery of gas with higher pressure  (currently for supply to Singapore).

Earnings Growth are Still a Long Way to Go

Other than the announcement of the Imbalance Cost Pass-Through  surcharge (ICPT) in 1H23 that will help to partly alleviate the adverse  impact of elevating Malaysia Reference Price (MRP) to its utilities  segment, we deem the group’s earnings growth to be slower or at  a 2-year CAGR of 3.5% in between FY22-FY24F. This is further  supported by itsi) Final Investment Decision (FID) of 3rd LNG storage  tank at Pengerang that was delayed to mid-2023 due to cost restrategising amidst rising costs, ii) a new Sipitang Power Plant latest  FID in end of 2026 and iii) the ancillary businesses (non-regulated  business) such as LNG bunkering, LNG truck loading, nitrogen  generation units, etc which negligible at the moment. Apart from  that, the company has started negotiating the third term gas  processing agreement (2024-2028) where the outcome will be  known by year-end.

FY22’s Earnings Met Expectations

PetGas’s 4Q22 revenue rose by 4.4% QoQ and 9.1% YoY to RM1.6bn stemming from higher  revenue from the Utilities segment on the back of higher product prices. However, FY22 core  earnings dwindled by 16.7% YoY to RM1.8bn owing to higher operating expenses coming from  internal gas consumption (IGC) in GP, GT, and utilities business. Meanwhile, the effective tax rate was smaller in 4Q22 or at 12.8% due to tax incentive granted for LNG regasification terminal in  Pengerang, Johor. This was negated by a one-off tax rate of 33% which is higher than the  Malaysian statutory income tax rate of 24%. All in, the result came within our expectations or at  97.6% of our full year estimate.

Dividend Payout

A fourth interim DPS of 22 sen (ex-date: 03 March and payment date: 15 March) was declared,  lifting net DPS to 72 sen (FY21: 82 sen). No special dividend was announced. While PetGas does  not maintain any dividend policy, management indicated that it is committed to pay at least 72  sen DPS annually. We foresee FY23-FY24F DPS to anchor a consistent dividend yield of >4%.

Earnings Revision

We cut our FY23F-24F earnings forecasts by 7%-11%, after incorporating a lower RP2 tariff  revision in gas transportation and regasification segments and higher operating expenses.

Maintain HOLD with Lower TP of RM15.98

We reiterate our HOLD call on PetGas with a lower TP of RM15.98 (RM18.48 previously) following  our earnings downgrade which is pegged at 18.1x PER to FY23F EPS of 88.4sen. The total return  including dividend yield is <10% which is fair given its neutral outlook.

Source: BIMB Securities Research - 21 Feb 2023