• Still NEUTRAL, with new MYR16.78 TP from MYR17.45, 1% downside. Petronas Gas’ margin could be still under pressure in view of elevated maintenance activities but partially cushioned by moderating Malaysia Reference Prices (MRP) in the upcoming quarters. While we see flattish growth in its core business in the near term, PTG still offers decent dividend yields backed by a strong balance sheet (1Q23 net cash: MYR124m).

• Within expectations. 1Q23 core earnings of MYR421m (+11% QoQ; +1% YoY) were within expectations at 22% and 23% of our and Street full-year estimates. A first interim DPS of 16 sen was declared (1Q22: 16 sen).

• Results review. 1Q23 revenue grew 15% YoY from the stronger utilities segment, led by higher electricity, steam, and industrial gases product prices. Despite this, 1Q23 core earnings only inched up 1% YoY as lower tax expenses (-28% YoY; in the absence of Cukai Makmur) were offset by higher operating expenses, mainly internal gas consumption (IGC), fuel gas, as well as depreciations expenses. 1Q23 core earnings also improved by 11% QoQ on the back of better JV & associate contribution (+1.3x QoQ).

• Outlook. Starting from the Regulatory Period 2 (RP2), the IGC and FX fluctuation will be reviewed annually and passed through in the subsequent year. Despite the MRP trending down in the upcoming quarters, we believe PTG’s margin could be still under pressure in view of higher maintenance activities. Overall capex for 2023 is guided at MYR1.2bn, with an equal split between regulated and non-regulated businesses. The final investment decision timeline of the third LNG storage tank at Pengerang has been delayed to 2H23. 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 c.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 maintain our earnings estimates but pare down our TP to MYR16.78 after rolling forward our valuation base year to FY24F and incorporating a 6% ESG discount, based on a revised ESG score of 2.7. 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.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 23 May 2023