PETGAS is investing in a RM650m compressor station in Jeram, Selangor, with commissioning in 2026. This is in addition to three other new projects which should drive PETGAS’s earnings growth under Regulatory Period 3 (RP3) in 2026-2028. We maintain our forecasts but raise our TP by slightly to RM17.87 (from RM17.80).

Maintain MARKET PERFORM. The stock offers c.4% dividend yield.

PETGAS is investing in a RM650m compressor station comprising of two units of gas compressor in Jeram, Selangor, with targeted completion in 2026. As part of PETGAS’ gas transportation and regasification business, this gas compressor station is to improve Peninsular Gas Utilities (PGU) III capacity in the Northern region, anticipating to meet future gas demand increase from 2026 onwards.

The project is part of the PGU III expansion regulated by the Incentive- based Regulation (IBR) framework. The IBR will determine the cost recovery of the project via Transmission Pipeline Tariff.

We are positive on the latest development as it expands PETGAS’s regulated asset base (RAB) for RP3 which over the 3-year period from 2026 to 2028 and enhance its absolute earnings. Prior to this, PETGAS has already committed to capex in FY24 in excess of RM1.1b comprising among others:

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

(ii) LNG storage expansion in Pengerang with COD targeted in mid- 2025; and,

(iii) Cold energy air separation unit (ASU) with COD targeted in 2026.

Forecasts. Maintained as contribution from the project will only come in beyond our forecast period.

Valuations. However, we raise our SoP-driven TP slightly to RM17.87 (from RM17.80, see Page 2), having reflected enhancement from the recent capex plans as mentioned. 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 its capex plans under the RP2 that will improve its absolute earnings, anchoring a decent dividend yield of 4%. However, its valuations are already rich at the 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 - 18 Mar 2024