Petronas Gas Berhad (PetGas) core profit of RM910mn improved by 12.7% YoY in 1H23 thanks to higher revenue from Utilities segment driven by higher product prices. The result was in line with ours and market forecast, accounting for 48.8% and 48.5% full year estimates, respectively. A 2nd interim DPS of 16sen was declared bringing the 1H23 payout to 32 sen. Moving forward, we anticipate earnings to remain stable for several reasons: 1) decreased foreign exchange volatility due to full early settlement of lease liabilities for floating storage units at LNG RGTSU, 2) extension of the ICPT surcharge in 2H23 at 17 sen/kWh, 3) long-term contracts and sustainable income stream under the 2nd Term of the Gas Processing Agreement (2024-2028), 4) declining gas prices, 5) new compression tariff for PGU in RP2 to offset the lower gas transportation tariff, 6) absence of prosperity tax, and 7) commendable operational excellence across all segments. Reiterate a HOLD call with a TP of RM15.98; based on DCF valuation method with a WACC of 7.9% and terminal growth of 0.3%.

• Within expectations. 1HFY23 net profit of RM910mn (+12.7% YoY) was in line with ours and consensus expectations accounting 48.8% and 48.5% of full year forecast respectively

• Dividend. The Group declared second interim dividend of 16sen per ordinary share, bringing 1H23 payout to 32 sen, which is the same as the payout in 1H22.

• QoQ: In 1Q23, revenue slightly declined by 2.2% to RM1.6bn, primarily due to lower turnover from utilities segment stemming from steam and industrial gases that followed lower product price which aligned with the declining fuel gas price movement. Nevertheless, earnings jumped 11.7% due to higher contribution in all segment thanks to lower operating expenses and fuel cost.

• YoY. Top-line increased by 8.8% YoY propelled by higher revenue from Utilities segment. Additionally, PBT extended by 12.1% due to higher gross profit along with higher share of profit from JV companies, decent interest income from fund investments and lower exposure from foreign exchange movement due to early settlement of USD lease liabilities for floating storage units at LNG RGTSU. Concurrently, earnings rose 19.4% in tandem with higher PBT and lower tax expenses.

• Outlook. We believe PetGas’s earnings to remain sturdy owing to 1) reduced exposure to foreign exchange volatility following the full early settlement of lease liabilities for the floating storage units at the LNG RGTSU Melaka, 2) the extension of the ICPT surcharge in 2H23 at 17 sen/kWh (compared to 20 sen/kWh in 1H23), 3) long-term contracts and sustainable income stream under the 2nd Term of the Gas Processing Agreement (2024-2028), 4) a decline in gas prices that is expected to ease fuel cost pressures, 5) the introduction of a new compression tariff of RM 0.553/GJ for PGU in RP2 to offset the lower transportation tariff, which decreased by 6% YoY in 2023, 6) the absence of a prosperity tax, and 7) the consistent operational excellence displayed across all segments.

• Forecast. Unchanged.

• Our call. Maintain a HOLD call with a TP of RM15.98. Our valuation is derived based on DCF valuation with a WACC of 7.9% and a long-term growth of 0.3%.

Source: BIMB Securities Research - 28 Aug 2023