• Keep NEUTRAL and MYR17.47 TP, 4% downside. Petronas Gas delivered a flattish set of results in 1H24 without any surprises. 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. PTG still offers decent FY24F-26F dividend yields of c.4.4-4.5%, backed by a strong balance sheet (net cash of MYR26m as of 2Q24).

• Within expectations. 1H24 core earnings of MYR941m (+1% YoY) are within expectations, at 51% and 49% of our and Street full-year estimates. A second interim DPS of 16 sen was declared, lifting 1H24 DPS to 32 sen (2Q23: 16 sen).

• Results review. 2Q24 core earnings remained flattish QoQ, as the higher contribution from JV & associates (+68%) was partially offset by the weaker gas transportation and utilities division. Cumulatively, 1H24 core earnings inched up by 1% on stronger numbers from transportation (+11%; lower internal gas consumption expense and opex) masking the weaker contribution from the other three segments as a result of higher depreciation charges, maintenance costs, and floating storage units operating lease.

• Outlook. 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 Incentive-Based Regulation (IBR) framework and will be compensated via a transmission pipeline tariff. Meanwhile, the jointly owned Sipitang power plant is also slated for completion by end-2026. The >MYR100m third LNG storage tank project at Pengerang is still progressing as planned, with the commercial operation date scheduled for mid-2025. 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 and TP of MYR17.47 (including a 6% ESG discount, based on the group’s ESG score of 2.7). 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 - 21 Aug 2024