DEVELOPMENT

• Petronas Gas (PTG)'s wholly owned subsidiary, Regas Terminal Pengerang (RGTP), has executed and completed a share subscription agreement with Dialog's wholly owned subsidiary, Dialog Equity Three (DE3), for the development of Malaysia's first LNG-driven air separation unit (ASU) in Pengerang, Johor.
• The issued and paid-up share capital of RGTP will increase to RM36.8m (+38%) comprising of 1,800 ordinary shares and 35,003 redeemable preference shares, with PTG having a 72% stake.
• The total awarded EPCC cost to Dialog is RM368m, with target commercial operation date in November CY26.

OUR VIEW

• Long-term revenue stream. The project is expected to develop based on a design, build, and lease model, where the ASU will be constructed and leased to a qualified and experienced industrial gas market operator for a 25-year period. In return, RGTP will generate a consistent revenue stream through fixed monthly facility charges paid by the operator. For Dialog (BUY, TP:RM2.72), the financing for the EPCC will come from internally generated funds and external borrowings, including sukuk proceeds. Given that the ASU market is valued at approximately RM28b in CY23, with anticipation of a +5% 10-Y CAGR driven by increasing demand from oil and gas sector, we believe that the long-term lease and operations of the proposed LNG-driven ASU will contribute positively for both companies.
• Project aligns with ESG goals. The project is expected to reduce electricity consumption by approximately 25% and lower carbon emissions by 15kT annually, compared to traditional ASU plants, which has the typical consumption between 9-13 billion kWh per year (ideal: 6-7 billion kWh per year) and emit 1.1-1.8mT of CO2 per year (ideal: 730kT of CO2 per year). We believe this project is in tandem with both PTG and Dialog's ESG agenda, while ensuring a long-term sustainability of ASU operations by utilising LNG - one of the cleaner fuels in the energy market - as part of the project.
• Overall, we are optimistic on both PTG and Dialog for this project. We are mainly positive for PTG, in consideration that the LNG market is expected to gradually improve amid energy transition advocacy and energy security in our local and regional front. We opine that PTG will benefit from the cost-effectiveness of the LNG-driven ASU, signalling the group as one of the leading sustainable energy solutions providers within the sector. Nevertheless, we noted the possible risks to the project in the long run, including: (i) fluctuations in LNG prices, (ii) technological risks, and (iii) regulatory changes within RGTP.
• Considering that the project has no impact on PTG's financials due to the commercial operation expected in late CY26, we make no changes to our forecast projection for PTG, and maintain our BUY call, with a target price of RM19.23.

Source: MIDF Research - 20 Jan 2025