• PTG’s 9M23 results were largely in line with our expectations, making up 75% of our full-year forecast.

• Negotiations for the 3rd term GPA with Petronas have been concluded and it is exploring several green energy projects in support of the NETR.

• Maintain Hold with an unchanged DCF-based TP of RM17.00.

3Q23 Results Review

• Petronas Gas’s (PTG) 3Q23 normalised net profit decreased by 5% qoq , mainly due to lower revenues from its Utilities segment on the back of lower product prices and volumes following the plant shutdown in Kertih, Terengganu.

• On a yoy basis, 3Q23 normalised net profit was flattish yoy mainly due to narrower margins across all its business segments from higher operating expenses and maintenance costs, which more than offset the strong performance from Utilities.

• For 9M23, PTG’s normalised earnings were flattish as the higher revenues (+5% yoy), reduced finance costs and improved JV contributions were offset by lower margins realised across all segments (save for Utilities). The normalised earnings were in line with our expectations at 75% of our full-year 2023F forecast.

• The company declared a third interim net DPS of 18sen, taking 9M23 DPS to 50sen.

Updates From Analyst Briefing

• Negotiations with Petronas for the 3rd term gas processing agreement (GPA) spanning 2024-2028 have been concluded, with the new contract expected to begin on 1 January 2024. According to management, there is no change in capacity booked under the new 5-year contract but further details on the terms and tariffs will be disclosed at the analyst briefing in February 2024, once the new agreement has been signed.

• The company is exploring several green energy initiatives in support of the government’s National Energy Transition Roadmap (NETR): 1) Carbon capture and Storage (CCS) – ongoing cooperation with Petronas to assess the feasibility of constructing an onshore CO2 gathering hub in Kertih as part of Petronas’s decarbonisation programme, 2) Hydro – signed an MOU with Menteri Besar Terengganu Incorporated in June 2023 to explore the potential development of a 40MW mini hydroplant, with FID on the project expected to be determined in 2H24, and 3) Solar – ground mounted solar farm development at its land in Kertih to supply green electricity to its customers within the Utilities segment.

Maintain Hold on PTG

• We maintain a Hold rating on PTG with an unchanged DCF-based TP of RM17.00 (WACC: 8.2%; TG: 1.5%). Despite the relatively lacklustre earnings growth on offer given its defensive earnings profile from the ownership of gas infrastructure assets in Malaysia, the stock offers attractive yields of close to 5%, backed by a strong net cash balance sheet. Upside risks: higher-than-expected margins and FID on the CCS facility. Downside risks: unplanned plant shutdowns and resurgence in gas prices.

Source: CGS-CIMB Research - 21 Nov 2023