• NEUTRAL, new MYR17.47 from MYR17.04, 4% downside. Petronas Gas’ results are in line, with core earnings improving 11% YoY on stronger gas processing and transportation contributions as well as lower operating costs. We expect the group to continue investing in both regulated and non- regulated projects, but near-term earnings could be still pressured by elevated maintenance costs. While we see flattish growth in its core business in the near term, PTG still offers decent dividend yields of c.4.4-4.5%, backed by a strong balance sheet (1Q24 net gearing of 0.01x).

• Within expectations. 1Q24 core earnings of MYR470m (+7% QoQ, +11% YoY) are within expectations, at 25% and 24% of our and Street full-year estimates. A first interim DPS of 16 sen was declared (1Q23: 16 sen).

• Results review. 1Q24 core earnings improved by 7% QoQ, led by higher reservation charges for the gas processing division and gas transportation revenue following the upward tariff rate adjustment that took effect this year. This was further anchored by a decrease in opex, as a result of lower maintenance activities. YoY, 1Q24 core earnings also increased by 11% on stronger numbers from utilities (+32%; lower fuel gas cost) and gas transportation (+32%; lower internal gas consumption expense and opex).

• Outlook. In March, PTG announced that it will build a new compression station in Jeram, to improve Peninsular Gas Utilities III capacity, with a total investment cost of <MYR650m. This project will be regulated under the Incentive-Based Regulation (IBR) framework and will be compensated via a transmission pipeline tariff. The >MYR100m third LNG storage tank project at Pengerang is still progressing as planned, with the commercial operation date scheduled for mid-2025. The recently announced IBR tariff adjustment for FY24 is estimated to lift segmental revenue by 1.6% this year. Overall maintenance activities scheduled for this year are likely to be similar to that of FY23, but maintenance costs will be higher due to the implementation of an 8% service tax. Capex spending is also guided to be higher this year with a 60:40 ratio between non-regulated and regulated capex. As our dividend payout ratio assumption is 85% (vs the average 5-year payout ratio of 90%), PTG still offers decent dividend yields of c.4.4-4.5% for FY24-26F.

• We maintain our earnings estimates but lift our TP to MYR17.47 after rolling forward our valuation base year to FY25. Our TP incorporates a 6% ESG discount, based on the group’s ESG score of 2.7 out of 4 (country median: 3). 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 - 30 May 2024