• Still NEUTRAL and MYR16.78 TP, 2% downside. 1H23 results met expectations with core earnings improving 7% YoY on stronger utilities contribution masking elevated operating costs. While we see flattish growth in its core business in the near term, Petronas Gas still offers decent dividend yields backed by a strong balance sheet (2Q23 net cash: MYR121m).

• Within expectations. 1H23 core earnings of MYR930m (+7% YoY) were within expectations at 51% and 50% of our and Street full-year estimates. A second interim DPS of 16 sen was declared (2Q22: 16 sen).

• Results review. 2Q23 revenue decreased by 2% QoQ, no thanks to lower contribution from steam and industrial gases product sales following lower product prices in line with downward fuel gas price movement. Despite this, 2Q23 core earnings improved by 21% QoQ to MYR509m driven by lower operating expenses, mainly internal gas consumption (IGC) and fuel gas. Cumulatively, 1H23 core earnings also strengthened by 7% YoY on the back of stronger utilities (+1.9x; favourable impact from better contract renewals) masking weaker contributions from its other three divisions which experienced higher operating costs.

• Outlook. Starting from the Regulatory Period 2 (RP2), the IGC and FX fluctuations will be reviewed annually and passed through in the subsequent year. Despite the Malaysia Reference Price (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 to be a similar amount to last year at an estimated MYR1.2bn, with an equal split between the regulated and non-regulated businesses. The final investment decision timeline of the third LNG storage tank at Pengerang remains in 2H23. PTG is looking to play a vital role in the carbon capture and storage (CCS) integrated value chain. The company is still assessing the opportunities available and hopes to materialise them. Meanwhile, it has started negotiating the third term gas processing agreement (2024-2028) and the outcome will be known by end-3Q23. 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 and our TP at MYR16.78. Our TP also incorporates a 4% ESG discount, based on an ESG score of 2.7. Key upside risks: Stronger-than-expected operating margins and lower-thanexpected tariff cuts. Key downside risks: Higher-than-expected tariff cuts and the removal of gas subsidies.

Source: RHB Securities Research - 28 Aug 2023