Review

• Petronas Gas Berhad’s (PETGAS) 1HFY24 core earnings came in within expectations, accounting for 46% and 49% of our and consensus’ full year estimates respectively.

• The group declared a second interim dividend of 16.0sen/share in 2QFY24 (2QFY23: 16.0sen/share), bringing 1HFY24 dividend to 32.0sen/share (68% DPR).

• QoQ: 2QFY24 revenue increased 1.8% QoQ to RM1.65bn mainly driven by higher revenue from the Utilities segment given higher steam volume and price in line with fuel gas price movement. Despite the higher revenue, gross profit fell marginally by 0.7% to RM596.9mn mainly due to lower margins at the Utilities division given higher fuel gas cost during the quarter; average fuel gas price was higher by 6.2% at RM49.24/MMBtu in 2QFY24 (1QFY24: RM46.36/MMBtu). Core net profit, however, was largely flattish QoQ as the lower gross profit was partly compensated by higher JV and associate earnings.

• YoY: 2QFY24 revenue increased marginally by 0.7% YoY mainly driven by higher revenue from the Gas Processing (+5.3% YoY) and Gas Transportation (+5.0% YoY) segments. The former was driven by higher reservation charges under the 3rd Term Gas Processing Agreement (GPA) effective Jan24. Meanwhile, the latter was driven by upward tariff adjustment related to internal gas consumption expenditure under the Incentive Based Regulation (IBR) framework. Despite higher revenues, gross profit weakened 8.4% YoY mainly given higher maintenance activities at the Gas Processing, Gas Transportation and Utilities segments during the period. In tandem, group core earnings fell 11.5% YoY.

Impact

• No change to our earnings forecasts.

Outlook

• PETGAS has finalised and agreed with the key terms of the 3rd term GPA with Petronas and the agreement has commenced effective 1 Jan 2024. entailing higher fixed fee of RM1.7bn (RM1.61bn in 2nd term GPA) and higher performance fee of RM120mn (RM90mn in 2nd term GPA). Part of the benefit, however, is expected to be offset by higher operating expenses as the plants age.

• PETGAS offers attractive dividend yield at 4.8%-5.4% over FY24-26 (85%- 90% DPR) backed by resilient earnings from long-term contracts and regulated businesses, coupled with a strong net cash position.

Valuation

• Maintain Buy with a higher sum-of-parts derived target price of RM21.20/share as we now attach a 3% ESG premium in line with our 4- star rating for PETGAS.

Source: TA Research - 21 Aug 2024