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 a 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’ 1QFY24 core net profit (CNP) of RM469.5mil, excluding unrealised forex gains, came in broadly within estimates at 26% of our earnings forecast and 24% street’s.

• The group declared a first interim dividend per share (DPS) of 16 sen, which translates to a payout ratio of 69% – above its policy of 50%.

• YoY, PGas’s 1QFY24 revenue declined marginally by 3.4%, as lower product prices for the utilities segment were largely offset by higher reservation charges and upward tariff adjustments for the gas processing and gas transportation division. However, PGas’s 1QFY24 CNP rose higher by 11% due to stronger operating profit from lower fuel gas and internal gas consumption coupled with decreased finance costs.

• QoQ, PGas’s 1QFY24 revenue rose by 2.3%, driven by the regulated businesses, whilst CNP saw a higher increase by 9% due to strong operating profit in nearly all segments on the back of lower maintenance expenses.

• The group’s operating performance remains strong with product reliability at >99% due to lower steam demand from shutdowns at the client’s side.

• 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 FY24F PE of 20x, broadly close to the pre-FY20 peak, we believe valuations remains appealing supported by dividend yields of 4%-5% 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 - 30 May 2024