FY20 earnings growth was driven by high plant reliability, higher RP1 tariffs and new ancillary revenue contributions. Management has budgeted RM541m to invest into a new lateral gas pipeline project to a new power plant in Pulau Indah and related industrial area, which will boost the asset value of Gas Transportation segment for RP2. The ongoing capital structure review by the management will support our expected strong dividend payout for coming years (declared 127 sen/share for FY20). We maintain our BUY recommendation on PGB with unchanged SOP-derived TP of RM19.22.

FY20 results recap. PGB reported a strong FY20 core profit of RM2.0bn (+6.1% YoY) in line with HLIB and consensus. The result was underpinned by high plant reliability (for Gas Processing) and higher RP1 tariffs (for Gas Transportation and Regasification) with the inclusion of Internal Gas Consumption (IGC) recovery as well as new contribution from ancillary services – LNG truck loading and LNG bunkering.

New pipeline project. Management has approved a new 42km pipeline extension project to a new power plant in Pulau Indah and related industrial areas. The budgeted investment cost is RM541m, which will be included as part of the regulated asset calculation under the RAB structure for the following RP2 2022 -2024. Management is guiding for allowable return for the new investment to be similar of existing RP1 (subject to EC’s approval).

Capital structure. Management will continue to review the group’s optimum capital structure as the group is currently in net cash position (72.7sen/share) as compared to the debt-to-equity ratio assumption of 65:35 under RAB framework. Hence, we expect continued strong dividend payout for coming years. The dividend for FY20 was RM1.27/share (including special dividend of 55sen/share).

Diversification. Moving forward, PGB will explore new business opportunities such as integrated utilities solution and new power generation (including RE), by leveraging onto the group’s existing infrastructure, experience and relationship.

Forecast. Unchanged as the briefing yielded no major surprises.

Maintain BUY, TP: RM19.22. We maintain BUY on PGB with TP of RM19.22, based on SOP, supported by: (i) healthy balance sheet with net cash position (72.7sen/share); (ii) sustainable earnings and strong cash flow; and (iii) dividend yield of 5.3% (with potential upside from special dividend).

Source: Hong Leong Investment Bank Research - 24 Feb 2021