• PTG revealed that it has formalised its third term GPA with a higher fixed reservation charge, while all other terms remain largely unchanged.

• The company is embarking on several new growth projects, which it expects will be completed between 2H25F and 2026F.

• Reiterate Hold with a higher DCF-based TP of RM17.50.

Implementation of 3rd term GPA commenced in January 2024

At an analyst briefing on 28 Feb, Petronas Gas (PTG) revealed that it has signed the third term Gas Processing Agreement (GPA) with Petronas commencing 1 Jan 2024 until 31 Dec 2028. Under the new terms (Fig 1), the fixed reservation charge has been increased by 5.7% to RM2,688/mmscfd (from RM2,524/mmscfd during the 2nd term) with the booking capacity remaining unchanged at 1,750mmscfd and performance-based incentives (PBS) raised to RM120m (from RM90m in the 2nd term) with the increment stemming from incentives to encourage optimisation of the usage of internal gas consumption. All other terms remained the same as the previous five-year term (2018-2023). All-in, the new GPA was largely within our expectations as we had factored in a 5% increase in the fixed reservation charge in our forecasts.

Several new growth projects in the pipeline

PTG is currently embarking on several new growth projects (albeit small relative to the size of the group’s existing asset base) which it expects will be completed between 2H25F and 2026F. Some of the key projects include a new 200k cbm LNG floating storage unit (FSU) in Pengerang (COD: 2H25), 52MW Sipitang gas-fired power plant (capex: RM250m; COD: 2026), and a cold energy air separation unit (ASU) (capex: RM400m; COD: 2026). The company expects these new projects to add incrementally to group capex over the next three years, beyond the regular annual maintenance spend of ~RM800m.

Projecting pedestrian growth in earnings between 2024-2026

After updating our numbers for the 2023 results, we have reduced our 2024F-26F forecasts by 2-4% mainly on the back of higher depreciation charges following the elevated run -rate in 4Q23 and introduce maiden estimates for 2026F. We now project net earnings to grow at a CAGR of 5% in 2023-2026F, driven mainly by the higher gas processing revenues and some recovery in margins from a normalisation in gas costs. Our DCF-based TP moves up to RM17.50 (from RM17.00) as we roll our valuation forward by one year.

Maintain Hold

We maintain a Hold rating on PTG with a DCF-based TP of RM17.00 (WACC: 7.7%; TG: 1.5%). Despite the relatively lacklustre earnings growth on offer given its defensive earnings profile from the ownership of gas infrastructure assets in Malaysia, the stock offers attractive yields of 4-5%, backed by visible FCFs and strong net cash balance sheet which we believe can more than fund these dividends despite the heightened capex plans. Upside risks: higher-than-expected margins and FID on the carbon capture and storage (CCS) facility. Downside risks: unplanned plant shutdowns and resurgence in gas prices.

Source: CGS-CIMB Research - 29 Feb 2024