• Keep NEUTRAL, new MYR17.37 TP from MYR17.72, 0% upside. Petronas Gas’ 1Q22 results are in line. Core earnings fell by 25% YoY, dragged by higher operating costs and an increase in tax expenses (Cukai Makmur impact). The stable core business will continue to provide decent dividend yields of 4.5-4.7%. Meanwhile, the outcome of the Regulatory Period (RP) 2 (2023-2025), which stipulates regasification and transportation tariffs, will be known by the end of the year.

• 1Q22 core earnings of MYR418m (-14% QoQ, -25% YoY) came in within expectations, at 21% and 22% of our and Street full-year estimates. Similar to 1Q21, a first interim DPS of 16 sen was declared.

• Results review. Revenue declined by 3% QoQ on the weaker utilities segment, led by lower industrial gas and steam sales, amidst planned maintenance exercises at customers’ facilities as well as lower regasification revenue. As such, 1Q22 core earnings contracted by 14% QoQ to MYR418m, no thanks to a weaker utilities contribution (-61%) and softer JV profit (-33%). 1Q22 core earnings also declined by 25% YoY, dragged by all segments – particularly the utilities (-71% YoY, on weaker margins as a result of high fuel costs) and regasification (-11% YoY, on higher operating costs) divisions. Apart from that, we have also seen higher tax expenses in 1Q22 (+11% QoQ, +16% YoY) with the imposition of Cukai Makmur, ie the one-time prosperity tax levied.

• Stable earnings from core businesses. While the gas transportation and regasification segments should remain stable in FY22 with the continuation of RP1, the outcome of RP2 will likely be known by end-FY22. PTG’s utilities margin is under pressure due to high fuel gas prices, which is a non-pass- through cost for electricity sales. The company is looking to finalise the renewal of several long-term contracts for the utilities segment by year-end. It still offers decent dividend yields of 4.5-4.7% for FY22F-24F, assuming an 82% dividend payout ratio – which is a shade lower than its average 5- year payout ratio of 88%.

• Stay NEUTRAL. While we maintain our earnings estimates, our SOP- derived TP drops to MYR17.37 from MYR17.72, following the cut in its ESG score to 3.0, from 3.1. As such, we ascribe a 0% premium or discount to its intrinsic value (since the ESG score is on par with the country median). PTG has set an emissions cap limit of 5m tonnes of CO2 equivalent (tCO2e) throughout the year – to be achieved by 2024 – greenhouse gas (GHG) emissions surged by 29% YoY in 2021 due to higher production demand. Key upside risks: Stronger-than-expected operating margins and lower- than-expected tariff cuts. Key downside risks: Higher-than-expected tariff cuts and the removal of gas subsidies.

Source: RHB Research - 20 May 2022