• Keep NEUTRAL and MYR17.47 TP, 2% downside. Petronas Gas delivered a stable set of results in 9M24 without any surprises. The group is targeting to spend more on non-regulated projects next year. Near-term earnings, in our view, could remain flattish no thanks to elevated maintenance costs. PTG still offers decent FY24F-26F dividend yield of c.4.5-4.6%, backed by a strong balance sheet (net cash of MYR233m as of 3Q24).

• Within expectations. 9M24 core earnings of MYR1.4bn (-2% YoY) met expectations, at 74% and 72% of our and Street full-year estimates. A third interim DPS of 18 sen was declared, lifting 9M24 DPS to 50 sen (3Q23: 18 sen).

• Results review. 3Q24 core earnings fell 6% QoQ, dragged by higher maintenance activities amidst flattish revenue. Cumulatively, 9M24 revenue inched up marginally by 1% driven by higher gas processing revenue following higher reservation charges but partially offset by weaker utilities revenue on lower product prices. 9M24 core earnings fell marginally by 2% on higher operating costs, led by higher maintenance activities and coupled with higher tax expenses.

• Outlook. Maintenance activities are expected to remain elevated in 4Q24 while elevated cost of doing business is also likely to persist next year. Capex spending is guided to be higher this year with a higher allocation to nonregulated capex. These includes the two jointly-owned power plants in Sabah – 52MW Sipitang power plant and a second 100MW Kimanis power plant with an estimated capex of MYR230m and MYR700m. The two plants are scheduled to be commercialise by end-2026 and March 2026. The projects’ internal rate of return is guided to be in line with Malaysia’s power plant returns. The >MYR100m third LNG storage tank project at Pengerang is still progressing as planned, with the commercial operation date scheduled for mid-2025. On regulated projects, construction of a new compression station in Jeram with a total investment cost of <MYR650m is on track for completion by end 2026. This project will be regulated under the IncentiveBased Regulation (IBR) framework and will be compensated via a transmission pipeline tariff. As our dividend payout ratio assumption is 85% (vs the average 5-year payout ratio of 90%), PTG still offers decent dividend yield of c.4.5-4.6% for FY24F-26F.

• We maintain our earnings estimates and MYR17.47 TP (including a 6% ESG discount, based on the group’s ESG score of 2.7). Key upside risks: Strongerthan-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 Securities Research - 28 Nov 2024