PETGAS’s FY22 results met expectation, although weaker YoY as higher fuel gas prices drove up operating costs. However, with gas prices abating, operating costs are expected to trend lower which should lead to a better FY23. PETGAS’s earnings stability remains strong with >90% safeguarded by the Incentive-based Regulation (IBR) framework, anchoring a consistent dividend yield of >4%. We maintain our FY23F net profit, TP of RM17.13 and MARKET PERFORM call.

FY22 core profit of RM1.73b met expectations. It declared a 4th interim NDPS of 22.0 sen (ex-date: 03 Mar; payment date: 15 Mar), tallying YTD FY22 NDPS to 72.0 sen which is lower than the 82.0 sen (inclusive of 10.0 sen special dividend) paid in FY21, in the absence of special dividend.

4QFY22 impacted by higher fuel gas price… Despite higher revenue by 4%, 4QFY22 core profit contracted 21% QoQ to RM378.9m as high gas prices led to higher internal gas consumption (IGC) costs for its regulated businesses, i.e., gas processing (GP, EBIT: -14%) and gas transportation (GT, EBIT: -82%) as well as non-regulated utilities segment (EBIT: -37%) with gas fuel being its input cost. However, the other regulated business – regasification terminals (RGT, EBIT: +11%) was not affected. The sharp decline in GT earnings was partly due to yearly reconciliation adjustment in the fourth quarter for this division. Meanwhile, the 4% rise in revenue was largely driven by utilities (+14%) on higher product prices - in line with high fuel gas price movements.

…leading to a lower FY22 core net profit which declined 15% YoY to RM1.73b despite revenue rising 9%. Similarly, high gas fuel costs hit utilities (EBIT -48%) with higher IGC costs (in line with gas fuel cost) for GP (EBIT -5%) and GT (EBIT -19%) while RGT (EBIT -7%) was impacted by higher utilities expenses. However, the weaker results were partly mitigated by favourable impact from contract renewals for utilities which allow a more balanced cost pass-through to customers. The slightly improved revenue was driven by utilities (+36% on higher product price in tandem with higher gas price) and GP (+2% on higher IGC incentive achieved).

We are keeping our earnings growth projections of 10% in FY23 before normalising to 1% in FY24. Given that gas prices are expected to soften in the near term, a recovery is expected in FY23 while medium term earnings growth will be driven by: (i) a new RM541m gas pipeline project to cater to an IPP in Pulau Indah (commercial operational date (COD) in mid-FY23), and (ii) a RM460m gas compressor station project in Kluang (COD in 1QFY24). Over the longer term, a 52MW power plant in Sipitang, Sabah (expected commissioning in 2026) will serve to support earnings growth.

We continue to like PETGAS for its earnings stability of which >90% is safeguarded by the IBR framework, and the Regulatory Period 2 (RP2) has reinforced its earnings stability which anchored decent dividend yield of >4%. However, its valuation is already rich at current levels; thus, we maintain our MARKET PERFORM rating with unchanged SoP-driven TP of RM17.13 (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 - 17 Feb 2023