• Still NEUTRAL, with new MYR17.45 TP from MYR17.35, 0% downside. Petronas Gas’ FY22 results missed our expectations due to weaker-than- expected gas transportation margin. The lower tariffs in Regulatory Period 2 (RP2) (2023-2025) may translate to lower gas transportation and regasification revenue as compared to RP1. While we see flattish growth in its core business in the near term, PTG still offers decent dividend yields backed by its strong balance sheet (net cash of MYR190m as of 4Q22).

• Below our expectations. FY22 core earnings of MYR1.7bn (-15% YoY) came in at 91% and 98% of our and Street full-year estimates. The negative deviation was mainly due to weaker-than-expected gas transportation margin. A fourth interim DPS of 22 sen was declared, lifting full-year DPS to 72 sen (FY21: 82 sen).

• Results review. 4Q22 revenue grew by 4% QoQ from the stronger utilities segment, led by higher steam and industrial gases product prices. Despite this, 4Q22 core earnings fell by 21% QoQ on higher operating expenses, mainly internal gas consumption, fuel gas, as well as repair and maintenance costs. FY22 core earnings also declined by 15% YoY as a result of lower margins across all the segments. FY22 tax expenses dropped by 4% YoY and we are guided that a quarter of the amount was related to Cukai Makmur ie the one-time prosperity tax which was levied.

• Outlook. The Government – through the Energy Commission – has approved the Incentive Base Regulation (IBR) framework in setting the base tariff for RP2. The lower tariffs may translate to lower gas transportation and regasification revenue. PTG’s utilities margin is under pressure due to high fuel gas prices but the ICPT surcharge in 1H23 will help to mitigate the impact. The diversification into ancillary businesses such as LNG bunkering, LNG truck loading, nitrogen generation units, etc are rather insignificant at this juncture. The final investment decision timeline of the third LNG storage tank at Pengerang has been delayed to mid-2023 due to cost re-strategising amidst rising costs. This project is regarded as a non-regulated business. Meanwhile, the company has started negotiating the third term gas processing agreement (2024-2028) and the outcome will be known by year-end. PTG still offers decent dividend yields of around 5% for FY23F-25F, assuming an 87% dividend payout ratio – which is a tad lower than its average 5-year payout ratio of 91%.

• We cut our FY23F-24F earnings by 5% to incorporate lower margins for gas transportation and regasification segments. That said, our SOP-derived TP rises slightly to MYR17.45 following the update of FY22 net cash position of MYR190m in our valuation. Our TP also includes a 0% premium/discount – which is in line with our in-house proprietary methodology since PTG’s ESG score is on par with the country median. 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 - 17 Feb 2023