Investment Highlights

• We maintain BUY on Petronas Gas (PGas) with a higher sumof-parts-based (SOP) fair value (FV) of RM19.97/share (from RM19.39/share previously) which implies a FY24F PE of 21.4x, close to 1 standard deviation above its 5-year average (Exhibit 3). This also reflects a 3% premium for our unchanged ESG rating of 4 stars (Exhibit 6), premised on Petronas’ strategy to achieve net zero carbon emissions by 2050F.

• The higher FV is to account for increased capacity at PGas’ Petronas LNG Regasification Terminal Pengerang (RGTP) in Johor following binding Heads of Agreement signed between its 65%-owned Pengerang LNG (Two) (PLNG2) with MISC for the supply, operation and maintenance of a Liquefied Natural Gas (LNG) Floating Storage Unit (FSU). Accordingly, we increase FY25F earnings by 4% to factor in this contract.

• PGas’ 9MFY23 core net profit (CNP) of RM1,410.6mil (excluding RM12.7mil unrealised forex gains) came in within expectations, accounting for 76% of our FY23F earnings and 75% of consensus estimates. For reference, 9M accounted for 78% of FY21-FY22 full-year CNP.

• The group declared a third interim dividend of 18 sen, bringing 9MFY23 dividends to 50 sen, which translates to a payout ratio of 72%.

• YoY, the group’s 9MFY23 revenue grew by 7.4%, driven by higher product prices within the utilities segment, particularly for steam and industrial gases, as a result of favourable terms from recent contract renewals and upward revision of the imbalance cost pass-through (ICPT) surcharge which allow more costs to be passed through from higher fuel gas costs.

• However, 9MFY23 CNP rose by a smaller 4.4% as the result was partially negated by lower margins, particularly for gas processing and transportation EBIT, which fell by 10.5% and 18.1% respectively due to higher depreciation charges and elevated internal gas consumption (IGC) costs amid higher gas prices.

• QoQ, PGas’ 3QFY23 revenue declined by 5.3% primarily due to the utilities segment which saw sequentially weaker product prices from lower fuel gas prices and downward revisions of ICPT surcharge for 2HFY23. Additionally, the segment also experienced lower sales volume following a planned plant turnaround in Kertih, Terengganu.

• In tandem with this, 3QFY23 CNP declined by 5.2% while lower financing costs, following early debt repayment of the floating storage unit (FSU) for the liquefied natural gas (LNG) regasification terminal in Sg. Udang, Melaka, and reduced tax charge was offset by higher depreciation.

• Throughput services (gas transportation and gas processing) continued to be the largest earnings contributor at 59% of 9MFY23 group EBIT, followed by regasification (13%) and utilities (27%).

• Salient highlights from the analyst briefing yesterday:
  ➢ Management had recently completed the 10km pipeline extension to Banting, Selangor and successfully achieved gas-in ahead of schedule in August 2023.
  ➢ PGas has concluded negotiations for the third Gas Processing Agreement (GPA) with parent company Petronas with the signing of the agreement expected by end-2023. Management indicated that the terms of the GPA will only be disclosed by 1QFY24.
  ➢ Following the signing of the binding Heads of Agreement with MISC in end-October 2023, the group guides that the LNG FSU is expected to have a capacity of 200k-cubic meter3 (m3). Recall that the charter, which is worth up to a sum of US$213.7mil (RM1.02bil) for a period of 20 years, will involve the conversion of MISC’s LNG carrier Puteri Delima Satu, which currently has a capacity of 137.5k m3. Upon completion, the FSU will be deployed at the RGTP in Pengerang, Johor by 2Q2025.
  ➢ The group is also planning additional flagship catalyst projects focusing on carbon capture and renewable energy with 3 key prospects: (i) a carbon capture and storage project in Kertih, Terengganu, (ii) a 40 megawatt (MW) mini hydro power plant in partnership with the state authority of Terengganu, and (iii) a 150MW solar power project with an undisclosed private partner.

• 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.

• The stock currently trades at an attractive FY24F PE of 18x, below the pre-FY20 peak of over 20x. This is supported by compelling dividend yields of 5% which could potentially be even higher if the group’s capital structure was further optimised from the current net cash position.

Source: AmInvest Research - 21 Nov 2023