• Still NEUTRAL, new MYR17.04 TP from MYR16.78, 6% downside. FY23 results were in line, with core earnings improving 7% YoY on stronger utilities contributions. This, in turn masked Petronas Gas’ elevated operating costs. While we see flattish near-term growth in its core business, PTG still offers decent dividend yields of c.4.4-4.5% backed by a strong balance sheet (4Q23 net gearing: 0.01x).

• FY23 core earnings of MYR1.9bn (+7% YoY) are within expectations, at 102% and 98% of our and Street’s full-year estimates. A fourth interim DPS of 22 sen was declared, lifting PTG’s full-year DPS to 72 sen (FY22: 72 sen).

• 4Q23 revenue rose 2% QoQ, led by higher product sales from the utilities segment. 4Q23 core profit contracted 9% QoQ to MYR439m, no thanks to higher maintenance-led operating costs and tax expenses. Cumulative FY23 core earnings strengthened 7% YoY on stronger utilities (+1.1x; favourable impact from better contract renewals). This masked weaker regasification (-15%) and processing (-11%) contributions, which booked higher operating costs (elevated depreciation and floating storage charges).

• Outlook. Starting from Regulatory Period 2 or RP2, the internal gas consumption or IGC and FX fluctuations will be reviewed annually and passed through in the subsequent year. We believe PTG’ margins could still be under pressure in view of elevated maintenance activities and higher cost of doing business. The recently concluded third gas processing agreement (2024-2028) will start from Jan 2024 with a new revised reservation charge and comparable performance-based incentives. The annual fixed fees and incentives (subject to performance) have been revised to MYR1.7bn (second term: MYR1.6bn) and MYR120m (from MYR90m previously). Meanwhile, PTG achieved final investment decision on the >MYR100m third LNG storage tank at Pengerang and commercial operation date or COD has been scheduled for mid-2025. Some of the on-going sustainability projects include a carbon capture and storage or CCS project in Kertih, 40MW mini hydro power plant, and 150MW solar power facility. While these projects’ capex has to be finalised, PTG is expecting higher growth capex moving forward. As the FY22 dividend payout of 77% is lower than the average 5-year payout of 90%, we trim our payout assumption slightly to 85% from 87%, which still translates to decent FY24F-26F dividend yields of c.4.4-4.5%.

• Our FY24F-25F earnings are tweaked upwards by 2% post housekeeping adjustments and our TP is lifted to MYR17.04 accordingly with the incorporation of a 6% ESG discount based on an ESG score of 2.7 vs the 3.0 country median. Key upside risks: Stronger-than-expected operating margins and lower-than-expected tariff cuts. Key downside risks: Higher- than-expected tariff cuts and the removal of gas subsidies.

Source: RHB Research - 28 Feb 2024