KUALA LUMPUR (Oct 18): AmInvestment Bank has trimmed its earnings forecast for Petronas Gas Bhd (PetGas) by 4% for the financial year ending Dec 31, 2022 (FY2022) on lower profit margins for the group’s gas transportation and regasification segments. This is to account for higher operating costs from increased fuel costs and lower foreign exchange assumptions.

However, the firm retained its FY2023-24 earnings forecasts on expectations that the new tariffs under the Regulatory Period 2 (RP2) would be able to fully compensate for the higher operating costs within the two regulated segments.

“Recall that the group’s earnings from the gas transportation and regasification segments, which collectively accounted for 61% of the group’s operating profit, were impacted by higher fuel costs via internal gas consumption in the first half ended June 30, 2022 (1HFY2022).

“We expect the increase in costs to be recovered through a revised three-year tariff under the RP2, which will commence next year,” said the research house's analyst Lucas Tan Jun Sian in a note on Tuesday (Oct 18).

He observed that as the Malaysia Reference Price — the primary benchmark for liquefied natural gas (LNG) prices in the country — increased by 14% quarter-on-quarter in the third quarter of 2022, gas prices are widely anticipated to remain elevated moving into the fourth quarter.

As such, assuming that internal gas consumption accounts for 5% to 8% of total costs within the gas transportation and regasification segments, Tan projected further deterioration of earnings before interest and tax margins by 2% to 3% for the two regulated segments in 2HFY2022.

On a positive note, he said PetGas’ gas processing segment would be shielded from higher gas prices, as its parent company Petroliam Nasional Bhd (Petronas) bears all the internal gas consumption cost under long-term gas processing agreements.

“We also highlight that the regasification segment’s earnings will be susceptible to the decline in the ringgit against the US dollar, as leasing charges for its regasification terminal in Sungai Udang are mainly denominated in dollars.

“Hence, a weaker ringgit will increase the leasing expenses, compressing the segment’s profit margins,” said Tan.

Meanwhile, Tan anticipates the group’s earnings growth in the near to medium term to be anchored by robust capital expenditure (capex) of above RM1 billion per annum over the coming years.

As at end-1HFY2022, he said the group had spent RM430 million on capex, with a target to step up investment expenditure for the remainder of FY2022.

“The group has yet to reach its final investment decision on its third LNG storage tank in Pengerang. The outcome is expected to be finalised by end-2022.

“We earlier estimated that the investment would translate into a negligible net present value accretion to our sum-of-parts valuation based on a storage tank capacity of 160,000 cubic metres, a capex of RM1 billion, as well as a conservative project internal rate of return of 5.5%,” he said.

Tan also recalled that PetGas intends to optimise its capital structure over the next three years by gradually increasing its net gearing ratio from 3% currently to the Energy Commission’s (EC) guided optimal ratio of 55%, a level that is comparable to other infrastructure companies.

To comply with the EC’s recommended optimal gearing ratio that would lead to lower weighted average cost of capital, he opined that PetGas could increase its debt financing for future capex, as well as distribute higher dividends to its shareholders.

“Hence, we do not discount the possibility of special dividends that could potentially raise FY2022-24 dividends per share by 53% to RM1.94 per share, implying an eye-watering yield of 11%.

“Nevertheless, we caution that the likelihood of special dividends could be moderated by higher-than-expected capex, as the company channels capital to fund new investments or acquisition propositions,” said Tan.

The analyst maintained his “buy” call on PetGas, with an unchanged fair value of RM20.05 per share, implying a FY2023 price-earnings ratio (PER) of 22 times, one standard deviation above the five-year average.

The stock, Tan added, is currently trading at an attractive FY2023 PER of 18 times, below the pre-FY2020 peak of over 20 times, supported by compelling dividend yields of 5%, which could potentially be even higher if the group’s capital structure is further optimised.

At the time of writing on Tuesday, PetGas was 10 sen or 0.61% lower at RM16.40, which translated into a market capitalisation of RM32.5 billion.