PETGAS’s FY23 results met expectations. Its FY23 core profit rose 7% driven by the utilities segment which benefited from the hike in Imbalance Cost Pass-Through (ICPT) surcharge. We raise our FY24F net profit forecast by 1%, lift our TP by 2% to RM17.80 (from RM17.45) and maintain our MARKET PERFORM call. The stock offers a dividend yield of c.4%.

PETGAS’s FY23 full-year core profit of RM1.85b met expectations. It declared a fourth interim NDPS of 22.0 sen (ex-date: 11 Mar; payment date: 25 Mar), bringing FY23 full-year NDPS to 72.0 sen, which matches the pay-out in FY22 but below our assumption of 81.5 sen (as we imputed a special dividend).

YoY, its FY23 revenue rose 5%, mainly attributable to the utilities segment (+18%) while the gas processing (+2%), gas transportation (- 2%) and regasification (RGT, -4%) segments were flattish to slightly negative. However, its EBIT was flat (-2%) as the doubling in utilities profits were offset by earnings decline at gas processing (-11%) and RGT (-15%). Nonetheless, its core profit grew 7%, thanks to a high share of profits from JV companies (+87%), a lower effective tax rate (- 5% as FY22 was impacted by Prosperity Tax) and lower minority interest (-28%).

Gas processing: The segment’s EBIT fell by 10%, despite a 2% hike in top line, due to higher depreciation following the completion of several capital projects.

Gas transportation: The segment’s EBIT was flattish, although topline dipped 2%, as lower revenue was partially offset by lower internal gas consumption.

Utilities: The segment’s top line grew 18% on higher product prices as well as higher electricity tariff with upward revision of ICPT surcharge.

Meanwhile, its EBIT doubled, attributable to stronger margin after the upward revision of ICPT surcharge.

RGT: The segment’s EBIT fell 15% as revenue fell 4% due to lower RP2 tariff for Pengerang RGT coupled with higher floating storage charges and depreciation expense.

QoQ, its 4QFY23 revenue rose 2% on the back of higher revenue contributions from utilities (+5%) and gas transportation (+3%).

However, its 4QFY23 core profit declined 9% due to higher opex on maintenance expenses as well as higher taxation (+38%), Forecasts. We raise our FY24F net profit forecast by 1% and introduce our FY25F forecasts that project a 2% net profit growth. However, we cut our FY24-25F NDPS estimates to 72.0 sen each from our previous assumption of 85% earnings pay-out.

Valuations. We upgrade our SoP-driven TP by 2% to RM17.80 (see Page 3) from RM17.45 as we roll over our valuation base year to FY25F from FY24F. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We continue to like PETGAS for its earnings stability of which >90% is safeguarded by the IBR framework, and the RP2 has reinforced its earnings stability anchoring a decent dividend yield of 4%.

However, its valuation is already rich at current levels. Maintain MARKET PERFORM.

Risks to our recommendation include: (i) regulatory risk, and (ii) a global recession hurting demand for power, steam and industrial gases.

Source: Kenanga Research - 28 Feb 2024