Investment Highlights

• We maintain BUY on Petronas Gas (PGas) with an unchanged sum-of-parts-based (SOP) fair value (FV) of RM19.97/share, which implies FY24F PE of 21.5x, close to 1 std dev above its 5-year average . This also reflects a 3% premium for our unchanged ESG rating of 4 stars , premised on Petronas’ strategy to achieve net zero carbon emissions by 2050F.

• Similarly, we maintain FY24F-FY26F earnings as PGas’ 1HFY24 core net profit (CNP) of RM941mil (excluding unrealised forex gains) came in broadly within estimates at 52% of our full-year earnings forecast and 49% street’s.

• The group declared a second interim dividend per share (DPS) of 16 sen, which translates to a payout ratio of 71% – above its policy of 50%.

• YoY, PGas’ 1HFY24 revenue declined marginally by 1.4% as broad-based improvement was dragged by the utilities segment from lower product prices despite higher sales volume. However, 1HFY24 CNP rose slightly by 1.2% from lower finance costs.

• QoQ, PGas’ 2QFY24 revenue rose by 1.8%, driven by regulated businesses as the gas processing segment benefitted from higher reservation charges under the new third Gas Processing Agreement terms and gas transportation’s upward tariff adjustment. 2QFY24 CNP saw a smaller rise of 0.5% as gross profit declined on the back of higher operating expenses, mainly depreciation and maintenance costs following higher completion of projects and activities performed, coupled with inflationary impact.

• The group’s operating performance remains strong with product reliability at >99%.

• We remain optimistic on the group’s near-term outlook, underpinned by resilient earnings from regulated segments (gas transportation and regasification) with guaranteed income coupled with imminent growth in non-regulated gas processing and utilities segments secured by long-term contracts and resilient demand from customers.

• Though the stock currently trades at a fair FY24F PE of 20x, broadly close to the pre-FY20 peak of over 20x, we believe the company remains appealing supported by dividend yields of 5%-6% which could potentially be even higher if the group’s capital structure was further optimised from the current net cash position to the levels of utilities companies.

Source: AmInvest Research - 21 Aug 2024