• Maintain HOLD (TP: RM15.98). PetGas 9MFY23 net profit of RM1.4bn (+11.8% YoY) was in line with our and consensus expectations, amounting for 73.9% and 72.9% respectively. A third interim DPS of 18 sen, consistent with 3Q22, was declared during the period. Although 3Q23 revenue experienced a slight decline of 0.9% YoY, attributed to lower turnover from regulated business (Regasification and Gas Transportation) due to reduced tariffs under RP2, earnings increased by 10.8% YoY. This improvement was driven by the absence of the prosperity tax, resulting in an effective tax rate of 18.7% for 3Q23 compared to 27.7% in 3Q22. We expect earnings to stay resilient powered by i) continued ICPT surcharge in 4Q23 at 17 sen/kWh (vs 20 sen/kWh in 1HFY23), ii) long-term contracts and sustainable income stream under the 3rd Term of the Gas Processing Agreement (2024-2028) and iii) normalisation in gas price to lift fuel gas cost (internal gas consumption expense) across all segment. Reiterate a HOLD call on PetGas with DCF derived TP of RM15.98 (WACC: 7.9%, TG: 0.3%).

• Key highlights. The Group's revenue slipped by 5.3% QoQ to RM1.5bn, primarily attributable to reduced revenue from the Utilities segment. This decrease was due to lower product prices and a decline in industrial gas sales volume, stemming from the planned plant turnaround in Kertih, Terengganu. The reduction in product prices was aligned with the downward movement of fuel gas prices and downward revision of ICPT surcharge for 2HFY23

• Earnings Revision. No change to our forecast.

• Outlook. We believe PetGas’s earnings to remain stable, owing to i) extension of ICPT surcharge in 4Q23 at 17 sen/kWh, ii) sustainable income stream under the 3rd Term of the Gas Processing Agreement (2024-2028), and iii) declining gas price to lift fuel gas cost. Apart from that, the Group also guided that it plans to invest in green portfolio, including the development of a carbon capture and storage facility in Kertih, a 40MW mini-hydro power plant along the rivers in Dungun, and a 150MW solar power generation project. While we view these developments positively, it's important to note that they are still in a nascent stage of development and pending materialization.

Source: BIMB Securities Research - 21 Nov 2023