Review

• Petronas Gas Berhad’s (PETGAS) 9MFY24 core net profit of RM1.38bn (normalised for RM51.3m EIs comprising mainly unrealised forex gain) came in short of our expectation but within consensus, accounting for 68% and 72% of full year estimates respectively. The shortfall against our forecast was mainly due to higher-than-expected operating expenses.

• The group declared a third interim dividend of 18.0sen/share in 3QFY24 (3QFY23: 18.0sen/share), bringing 9MFY24 dividend to 50.0sen/share (72% DPR).

• QoQ: 3QFY24 core net profit fell -5.4% QoQ mainly due to higher maintenance expenses during the quarter, which is typically backloaded in the year. This impacted most segments in particular gas processing and gas transportation segments, which saw earnings decline -4.6% QoQ and -2.2% QoQ respectively. The former was also impacted by lower revenue from IGC incentives and higher depreciation charges. These were partly offset by improved sequential earnings of the utilities division (+16.5% QoQ) which benefited from higher offtake as well as lower fuel gas (3QFY24: RM47.41/MMBtu vs 2QFY24: RM49.24/MMBtu) and maintenance cost.

• YoY: 3QFY24 core net profit fell -8.1% YoY. Like the above reason, the drag was mainly from higher maintenance and depreciation cost resulting in gross margin contraction. This is despite higher reservation charges for gas processing under the new GPA and upward tariff adjustment under the IBR for the gas transportation segment. In contrast, the utilities segment saw improved performance driven by higher offtake, notwithstanding higher fuel gas cost which rose +1.7% YoY.

Impact

• We trim our FY24E/25F/26F by 6.4%/8.3%/3.0% to factor in more conservative margin expectations given higher than expected operating cost.

Outlook

• PETGAS has finalised and agreed with the key terms of the 3rd term GPA with Petronas and the agreement has commenced effective 1 Jan 2024. entailing higher fixed fee of RM1.7bn (RM1.61bn in 2 nd term GPA) and higher performance fee of RM120mn (RM90mn in 2nd term GPA). Part of the benefit, however, is expected to be offset by higher operating expenses as the plants age.

• PETGAS offers attractive dividend yield at 4.6%-5.4% over FY24-26 (85%- 90% DPR) backed by resilient earnings from long-term contracts and regulated businesses, coupled with a strong net cash position.

• PETGAS sees opportunities from higher gas demand which is projected to increase by between 30%-70% over the next decade given: (i) Coal to natural gas demand replacement arising from some 7GW coal power plant retirement between 2029-2033, underpinned by the NETR’s emphasis on cleaner fossil fuels such as gas (ii) Increased underlying power demand from data centres, which could push gas demand to the higher end of the projected growth range. These are expected to drive the requirement for infrastructure expansion in regasification and pipeline facilities, as well as new gas power plant capacity, whereby PETGAS is looking to compete for new CCGT power plant capacity in Peninsular Malaysia.

• As it stands, PETGAS is collaborating, via a 60:40 JV, with NRG Consortium Sabah (a subsidiary of Yayasan Sabah) to develop a 100MWW CCGT power plant in Kimanis, Sabah. This is a brownfield development located next to the existing Kimanis power plant, involving capex of RM700mn and is targeted for COD by March 2026.

• In addition, PETGAS is in advanced stages to develop a 120MW CCGT power plant in Labuan via a similar 60:40 JV with a Sabah state owned company. The group has achieved the Initial Letter of Notification for the project and aims to proceed to securing the full Letter of Notification by year end and to finalise the PPA in 1QFY25. Given that this is a greenfield development, capex is expected to be higher at just under RM1bn.

Valuation

• Our sum-of-parts derived TP is revised slightly lower to RM20.30 (from RM21.20) given the earnings revision in this report, but our Buy call is maintained. PETGAS is positioned well as one of the key upstream proxies to the transition from coal to gas power as well as data centre-driven demand for power, being the largest gas infrastructure operator in the country.

Source: TA Research - 28 Nov 2024