PETGAS’s 9MFY22 results met expectations. Utilities saw improved margins in 3QFY22 as renewed contracts passed on higher fuel gas cost. PETGAS’s earnings stability remains strong with >90% safeguarded by the Incentive-based Regulation (IBR) framework, enabling it to consistently pay out generous dividends (translating to yields of 4-5%). We maintain our forecasts, TP of RM17.00 and MARKET PERFORM call.

9MFY22 results matched expectations with core profit of RM1.35b making up 76%/77% of house/street’s FY22 forecasts. It declared 3rd interim NDPS of 18.0 sen (ex-date: 29 Nov; payment date: 12 Dec), tallying YTD NDPS to 50.0 sen which is the same as 9MFY21.

A better sequential 3QFY22 with core profit rising 8% to RM482.2m on the back of 4% hike in revenue. While fuel gas price remained high, utilities unit managed to register higher operating profit by 65% to RM53.5m, with 13% higher revenue (on higher product price), thanks largely to the favourable impact from contract renewals. Meanwhile, earnings for regulated businesses, i.e., gas processing (GP), gas transportation (GT) and regassification terminals (RGT) were fairly flattish.

Generally, weaker YoY earnings on higher fuel costs. Despite higher revenue by 9%, 9MFY22 core profit fell 15% to RM1.35b owing to higher gas fuel cost that hit utilities (operating profit -51%), as well as higher internal gas consumption cost (in-line with gas fuel cost) for GT and RGT which saw their operating profits falling 8% and 10%, respectively. The improved topline was driven by utilities (+38% on higher product price in tandem with higher gas price) and GP (+2% on higher internal gas consumption incentive achieved).

Forecasts. Maintained.

Outlook. 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).

Maintain MP with TP of RM17.00. We continue to like PETGAS for its earnings stability of which >90% is safeguarded by the IBR framework, and will remain so during the coming Regulatory Period 2 (RP2), anchoring decent dividend yields of 4-5%. However, its valuation is already rich at current levels.

We maintain our SoP-driven TP of RM17.00 (see Page 3). 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 - 15 Nov 2022