1QFY22 earnings was affected by increase in gas fuel costs and lower contribution from JV Kimanis (affected by USD appreciation). Earnings for FY22 will remain affected by the increasing gas pricing. Nevertheless, we expect PGB to recover the higher IGC (for GTP and RGT) in subsequent RP2 2023 -2025, while the renewal of utilities contract terms will lower the negative impact of increasing gas costing. We maintain our HOLD recommendation on PGB with unchanged SOP-derived TP of RM17.85.

1QFY22 results recap. PGB reported a relatively weaker 1QFY22 core profit of RM447.3m (-5.5% QoQ; -18.6% YoY), below HLIB and consensus. The result was mainly affected by the increase in gas fuel costs, in tandem with the increasing gas Malaysia Reference Pricing (MRP) charged by Petronas as well as lower contribution from JV Kimanis (affected by appreciation of USD against RM).

GTP & RGT. Gas Transmission (GTP) and Regasification (RGT) incurred higher internal gas cost (IGC) during the quarter, due to the higher gas MRP, and subsequently affected the margins for the segments. We expect MRP to continue upward trends in coming quarters. Nevertheless, GTP and RGT will be able to recover any variation of IGC costing (vs benchmark pricing) in subsequent review for RP2 2023-2025. Management seeks to address the timing of IGC revision (in order to avoid fluctuation in margins affected by gas pricing) under RP2.

Utilities. Gross profit for the quarter was severely affected by the higher gas MRP despite the higher effective electricity tariff revision for 1HFY22. There is no gas cost pass-through mechanism under electricity contract with off-takers. Management seeks to renew expiring contracts to re-allocate higher gas cost proportion to non-electricity segment (which allow for pass-through) to reduce the impact of gas cost fluctuation issue.

Forecast. Unchanged.

Maintain HOLD, TP: RM17.85. We maintain HOLD on PGB with TP of RM17.85, based on SOP. We expect PGB’s near term earnings to remain affected by the increasing fuel gas costs (affected by the on-going Russia-Ukraine war), on top of the Prosperity Tax impact for the year.

Source: Hong Leong Investment Bank Research - 23 May 2022