KEY INVESTMENT HIGHLIGHTS

• 9MFY24 earnings up +3%yoy from lower internal gas consumption, favourable forex; came in within expectations
• 9MFY24 revenue up +1%yoy due to higher reservation charges, offset by lower product prices
• Stable earnings in coming quarters on strong cost management and sustainable pursuits
• Maintain BUY with TP: RM19.23

Maintain BUY, TP: RM19.23. Petronas Gas Berhad (PGB)'s 9MFY24 earnings result came in within our yearly earnings estimates at 74%. As such, we maintain our BUY call and target price to RM19.23 for PGB.

9MFY24 revenue up +1%yoy. PGB's 9MFY24 revenue gained by +1.2% to RM4.9b. The higher revenue was mainly contributed from Gas Processing, following higher reservation charges income under the new term. This was offset by lower product prices from Utilities.

9MFY24 normalised earnings up +3%yoy. 9MFY24 normalised earnings gained +3%yoy to RM1.4b. This was mainly driven by: (i) lower fuel gas cost and internal gas consumption expenses, in line with lower fuel gas price, (ii) reduction in financing costs following early settlement of lease liabilities for FSU at RGTSU, and (iii) favourable forex movement. These were partially offset by higher opex from maintenance activities in Gas Processing and Gas Transportation.

Gas Processing. 9MFY24 revenue rose +5.3%yoy to RM1.4b, due to higher reservation charges income under the new term of gas processing agreement effective 1st January 2024. Conversely, earnings dropped - by -1.1%yoy to RM615.4m. The lower results were due to higher maintenance activities and increased inflationary impact. The Gas Processing plant performed close to 100% reliability in 9MFY24.

Gas Transportation. 9MFY24 revenue added +5%yoy to RM897m, due to upward tariff adjustment mainly related to changes in internal gas consumption as allowed under Incentive-Based Regulation (IBR) framework by Suruhanjaya Tenaga. Meanwhile, earnings increased by +8%yoy to RM470.7m mainly attributable to lower internal gas consumption expenses, but partially offset by higher maintenance and depreciation expenses following higher project completion. The segment's pipeline network achieved close to 100% reliability in 9MFY24.

Regasification. 9MFY24 revenue added +0.4%yoy to RM1.0b, while earnings were down by -3.1%yoy to RM472.2m. The comparable revenue and lower earnings were due to higher opex, mainly from depreciation and FSU operating leases. RGTSU and RGTP sustained their strong reliability performance at 100%.

Utilities. 9MFY24 revenue declined by -3.5%yoy to RM1.6b, attributable to lower product prices for steam industrial gasses, in tandem with reduced fuel gas price and lower electricity tariff which was in line with downward revision of Imbalance Cost Pass-Through (ICPT) surcharge. Conversely, earnings added +0.9%yoy to RM236.8m, on the back of the favourable impact of lower fuel gas cost following downward movement of average Malaysia Reference Price (MRP). The average fuel gas price was lower by -13.1%yoy to RM47.67pMMBtu (CY23: RM54.86pMMBtu). PCG's Utilities plants close to 100% Product Delivery Reliability.

Stable performance until end-year. We reiterate our optimism for PGB's near-term prospects. PGB is expected to continue optimising its cost efficiency strategies to minimise the adverse impact of inflationary pressures and any unfavourable forex, while prioritising sustainable growth and shareholders' returns. With the recent Letter of Notification (LON) for the 100MW power plant project in Kimanis, Sabah, and the 120MW power plant project in Labuan, we anticipate that PGB will continue to uphold its commitment in sustainable energy conservation and transition in the utility's subsector.

Moving forward, we opine PGB will also continue to find opportunities to expand its facilities in all segments, in line with the energy transition efforts highlighted in the National Energy Transition Roadmap (NETR) and the anticipated Carbon Tax by 2026. Challenges in terms of the volatile commodity and energy prices, uncertainties in forex and elevated service provider pricing are expected to persist and subsequently increases opex in the near future. Other downside risks to PGB's near-term prospects also include regulation, policy and legal changes for refinery and transportation, notably on the acceptance of natural gas as a fuel source in replacement of other carbon-heavy fuel such as coal.

No changes to earnings estimates. In consideration that the 9MFY24 earnings came in within expectations, we make no changes to our earnings forecast for PGB. We maintain a BUY call for PGB, with an unchanged target price of RM19.23, by pegging a PER of 18.5x to the EPS25 of 103.7sen. The PER is based on PGB's average 5-Y PER.

Source: MIDF Research - 28 Nov 2024