PETGAS’s 1HFY22 results disappointed, weighed down by higher fuel cost (i.e. gas) at its utilities unit, and a weak MYR. We continue to like PETGAS for its earnings stability of which >90% is safeguarded by the Incentive-based Regulatory (IBR) framework, anchoring a decent dividend yield of 4-5%. We cut our FY22F and FY23F net profit by 9% and 7%, respectively, lower our SoP-derived TP by 3% to RM17.00 (from RM17.51) but maintain our MARKET PERFORM call.

Missed expectations. 1HFY22 core net profit of RM865.6m only made up 44% and 46% of FY22F forecasts of ours and the market’s. The variance against our forecast came largely from: (i) higher fuel cost (i.e. gas) at its utilities unit (which produces and supply power, steam and industrial gases to industries), and (ii) higher lease charges for floating storage units at its regassification plant in Sg. Udang (Melaka) and the jetty at its regassification plant in Pengerang (Johor) on MYR’s weakness against USD, as the lease charges are denominated in USD.

1HFY22 turnover rose 9% YoY underpinned by: (i) price hikes at its utilities unit (to reflect the higher fuel cost), and (ii) higher electricity sales volume at its utilities unit following the economy reopening, as well as the supply to the grid under the New Electricity Despatch Arrangement (NEDA) from August 2021. However, its core profit fell 13% YoY due to the higher fuel cost and lease charges as mentioned, coupled with Cukai Makmur.

While the utilities unit demonstrated significant earnings volatility in 1HFY22, we take comfort that it typically contributes to only 5-10% of group profits, with the balance 90-95% coming from stable businesses, i.e. gas processing, gas transportation and regassification, of which earnings are safeguarded by the IBR framework.

Forecasts. We cut our FY22F and FY23F net profit by 9% and 7%, respectively, to reflect the adverse factors in 1HFY22 results. Correspondently, we also cut our FY22F/FY23F dividend forecasts by about 8% each to 77.0 sen and 81.0 sen (from 84.0 sen and 88.0 sen) based on the same 85% payout ratio.

We continue to like PETGAS for its earnings stability of which >90% is safeguarded by the IBR framework, and shall remain so during the coming Regulatory Period 2 (RP2), anchoring a decent dividend yield of 4-5%. Over the medium term, PETGAS’s earnings growth will be driven by: (i) a new RM541m gas pipeline project to cater to an IPP in Pulau Indah (commercial operation date (COD) in 1QFY23), and (ii) a RM460m gas compressor station project in Kluang (COD in 1QFY24).

We fine-tune down our SoP-derived TP by 3% to RM17.00 (from RM17.51), having: (i) rolled forward our valuation base year to FY23F (from FY22F), (ii) raised the WACC of its gas business to 7.9% (from 6.6%) to reflect a higher risk-free rate (while keeping the TG unchanged at 2%), and (iii) updated our TP for GASMSIA (OP; TP: RM3.43). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Risks to our recommendation include: (i) regulatory risk, and (ii) a global recession hurting demand for power, steam and industrial gases.

Source: Kenanga Research - 29 Aug 2022