PETGAS’s 1QFY23 results met expectations. The higher Imbalance Cost Pass-Through (ICPT) surcharge at its utilities  segment, was offset by lower tariffs under Regulatory Period 2  (RP2) for its Pengerang Regassification Terminal (RGT). Thanks to the incentive-based Regulation (IBR) framework, PETGAS’s  earnings stability remains strong which anchors a consistent  dividend yield of >4%. We maintain our forecasts, TP of RM17.13  and MARKET PERFORM call.

1QFY2 core net profit of RM421.4m met expectations at 22% each of both our full-year forecast and the full-year consensus estimate. It  declared a first interim NDPS of 16.0 sen (ex-date: 06 Jun; payment  date: 20 Jun) which is the same payout in 1QFY22.

YoY, 1QFY23 revenue grew 15% to RM1.46b driven by higher revenue  from utilities segment (+55%) on higher product prices for steam and industrial gases which was in line with higher fuel gas price, coupled  with higher electricity tariff on 20.0 sen ICPT surcharge for 1HFY23.

Conversely, operating profit fell 7% to RM555.4m in 1QFY23 owing to  higher gas prices, leading to higher internal gas consumption (IGC)  costs which was part of operating cost for its regulated businesses, i.e., gas processing (GP, EBIT: -11%) and gas transportation (GT, EBIT: - 33%). Lower RP2 tariffs for its Pengerang RGT as well as higher opex  resulted in lower earnings for its RGT segment (-9%). However, its  utilities earnings (+164%) jumped on the higher ICPT surcharge as  mentioned and 1QFY23 core profit inched up by 1% to RM421.4m due  to tax incentives granted for Pengerang RGT.

QoQ, 1QFY23 revenue grew 3% to RM1.67b mainly led by higher  revenue in utilities segment (+12%) on higher product prices and ICPT  surcharge mentioned above. Core profit rose by a larger 11% to  RM421.4m due to lower gas prices, leading to lower IGC costs for GP (EBIT: +5%) and GT (EBIT: +296%) as well as non-regulated utilities  segment (EBIT: +69%) with gas fuel being the key input. The significant  jump in GT’s earnings was also due to the low base in 4QFY22 on  annual reconciliation adjustments. Meanwhile, the ICPT surcharge also  lifted utilities earnings. However, the earnings for RGT (EBIT: -23%)  was negatively affected by the lower RP2 tariffs for Pengerang RGT as  well as higher opex.

Forecasts. Maintained.

We also maintain our 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).

We continue to like PETGAS for its earnings stability of which >90% is  safeguarded by the IBR framework, and the RP2 has reinforced its  earnings stability which anchored a decent dividend yield of >4%. However, its valuation is already rich at current levels. Maintain  MARKET PERFORM.

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

Source: Kenanga Research - 23 May 2023