• 1H22 core net profit was below expectations on weaker-than-expected gross margin, arising from higher fuel gas costs especially at utilities unit.
• 16 sen second interim DPS was declared as expected, bringing YTD DPS to 32 sen for 1H22, flat yoy.
• We reiterate our Hold call given weaker FY22-24F earnings profile vs. FY21 due to Cukai Makmur and IBR RP2, balanced by >4% dividend yields.

Key results highlights

Petronas Gas’s (PGB) 1H22 core net profit came in below expectations, at 46% of both our and Bloomberg consensus’ full-year estimates due to lower-than-expected gross margin arising from higher fuel gas costs, especially at the utilities unit. 1H22 core earnings (excluding forex movements) declined 12% yoy, largely dragged down by lower gross profit margin (-6.5%-pts yoy), weaker associates/JV contributions (-13% yoy), and higher effective tax rate due to Cukai Makmur (+RM59m yoy). The weaker 1H22 gross margin was due to lower profitability at gas transportation and utilities units, given the higher operating costs and higher fuel gas costs.

Stronger 2Q22 core net profit qoq lifted by utilities division

Qoq, 2Q22 core net profit rose 7% vs. 1Q22, mainly driven by higher gross profit at regasification (+5% qoq, in line with higher number of operating days and higher liquefied natural gas reloading fee) and utilities (+50% qoq, favourable impact from contract renewals with improved pricing structure to allow cost pass-through, and higher customer demand). 2Q22 core net profit increased 3% yoy, buoyed by stronger gross profit at gas processing (+9% yoy) and regasification (+32% yoy) due to lower operating costs. These more than offset the weaker gross margin at gas transportation (-2% yoy) due to higher operating cost (internal gas consumption cost in tandem with higher fuel gas prices), and utilities (-54% yoy) on lower margins due to higher fuel gas costs.

16 sen DPS declared

PGB declared a second interim DPS of 16 sen as expected, bringing total YTD DPS to 32 sen for 1H22 (vs. 32 sen for 1H21). PGB is investing continuously with six approved projects worth up to RM1.4bn since 2021, where most of the projects are under its regulated business entities. We gather that capex could double in 2H22 vs. RM430m in 1H22, given the projects in the pipeline and pick up in operation & maintenance activities.

Reiterate Hold

Our TP is revised to RM16.70 post-earnings revision, based on 17.1x FY23F P/E (its 2-year historical mean P/E). We retain our Hold call given the expected weaker FY22-24F earnings vs. FY21 due to Cukai Makmur and anticipated earnings step-down in FY23F arising from incentive-based regulation (IBR) RP2 (2023-25). Dividend yields of > 4% for FY22-24F will likely provide support to its share price.