PETGAS recently entered into a Third Term Gas Processing Agreement (GPA) with parent Petronas. It will embark on three major projects i.e., LNG storage expansion in Pengerang, cold energy air separation unit (ASU) and Sipitang power plant. We keep our forecasts, TP of RM17.80 and MARKET PERFORM call. The stock offers c.4% dividend yield.

We came away from PETGAS’s post-4QFY23 results briefing feeling optimistic about its outlook. The key takeaways are as follows:

1. Under the the Third Term GPA signed with parent Petronas in Dec 2023, PETGAS is entitled to slightly lower capex recovery but is still within the industry benchmark. The earnings driver for PETGAS is a higher asset base to grow gas sales and new sustainability projects. The fee and incentive structure under the Third Term GPA entails four key elements:

(i) Reservation Charge – fixed fee of RM1.70b (higher than RM1.61b under Second Term GPA) for capex and opex, and for sales gas produced up to 1,750mmscfd;

(ii) Performance Based Structure (PBS) – an incentive from RM90m to RM120m p.a. based on performance;

(iii) Flowrate Charge – No changes of variable costs for sales gas produced above 1,750mmscfd; and

(iv) Internal Gas Consumption (IGC) – incentive based on performance for PETGAS internal consumption of fuel gas.

2. PETGAS’s capex in FY24 capex is expected to top that of RM1.1b in FY23 with the key projects as follows:

(i) Sipitang power plant: EPCC progressing within schedule withtargeted commercial operation date (COD) in 2026;

(ii) LNG storage expansion in Pengerang had achieved final investment date (FID) in Sep 2023 and COD of mid-2025; and

(iii) cold energy ASU achieved FID in Dec 2023 and COD in 2026.

3. With regards to its recently announced FY23 results, the higher FY23 core profit of RM1.85b (+7%) was largely attributed to higher share of profit from JV companies (+87%, 60%-owned Kimanis Power Plant and 50%-owned Industrial Gases Solutions Sdn Bhd) and lower taxation (-5%, as FY22 was impacted by Prosperity Tax), partially offset by higher maintenance cost (due to higher planned activities and higher cost). Its 4QFY23 effective tax rate was higher at 23% vs. 17% in 3QFY23, due to:

(i) financial asset placement now taxable from non-taxable previously;

(ii) higher earnings income.

Forecasts. Maintained.

Valuations. We keep our SoP-driven TP of RM17.80 (see Page 2) unchanged. There is no adjustment to our TP based on ESG given a 3- star rating as appraised by us (see Page 4).

Investment case. 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 anchoring 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 - 29 Feb 2024