Strong outlook for PetGas, dividend to double

Given the group’s current net cash balance of RM237m, its forecast dividend for FY21 to FY22 could rise by 2.4 times

by ASILA JALIL/ pic credit:

PETRONAS Gas Bhd (PetGas) is expected to continue showing strong earnings in the near to mid term, with lower operating costs — a key driver in its recently concluded second quarter (2Q20) — a possible precursor to doubling its dividend in 2021.

The group is looking at optimising its capital structure to be comparable with other infrastructure firms, its management told a recent analyst briefing.

Under the Energy Commission’s (EC) guidelines, this could imply a debt-to-equity ratio of 55%, AmInvestment Bank Bhd (AmBank Research) wrote in a note last Friday.

“Given PetGas’ current net cash balance of RM237 million, a gradual increase in net gearing levels to 50% over the next three years will mean that the group’s forecast dividend per share for the financial years ending Dec 31, 2021 (FY21), to FY22 could rise by 2.4 times.

“As such, we believe that the group’s 2Q special dividend of 50 sen is only the start of a rousing re-rating catalyst for the stock. For now, our dividend forecasts are maintained pending the group’s performance over the next quarter,” it said.

PetGas’ estimated FY20 to FY21 capital expenditure (capex) is expected to be 17% lower at RM1 billion, compared to RM1.2 billion in FY19.

The stock currently trades at a price-earnings ratio of 15 times for FY21 — 21% below its three-year average of 19 times.

“This is unjustified as forecast FY23 earnings decline of 5% from the continuation of the EC’s incentive-based regulatory framework is unlikely to significantly reduce the group’s dividend payout ratio.

“If the group were to proceed with its optimal capital strategy, we estimate that FY21 dividend yield of 5% currently could surge to an eye-watering 12%,” AmBank Research added.

The research firm kept a ‘Buy’ call on the gas infrastructure and utility firm, with an unchanged fair value of RM21.30.

PetGas’ net profit rose 8.8% year-on-year (YoY) to RM547.1 million in 2Q20, helped by higher regasification revenue and better contribution from gas processing following lower operating costs. Group revenue climbed 1.4% YoY to RM1.4 billion.

The group also announced a second interim dividend of 16 sen and a special interim dividend of 50 sen, bringing its total dividend payout to RM1.3 billion for the quarter.

MIDF Amanah Investment Bank Bhd (MIDF Research) sees limited earnings upside in the coming quarters for PetGas, given the ongoing transfer of asset base from depreciated replacement cost to net book value under the incentive-based regulation, which will put pressure on the profitability of the group’s gas transportation segment.

“That said, we are of the opinion that the company will continue to perform, premised on a strong and stable income stream, ancillary business coming on board in the second half of the year (2H20) which will support core earnings and improved revenue recognition from gas transportation and regasification, following the better tariff for the regulatory period 1 (RP1),” it said.

It maintained a ‘Neutral’ call for PetGas with an unchanged target price (TP) of RM16.

Meanwhile, Petronas Chemicals Group Bhd (PetChem) is seen facing headwinds from slow product price recovery and lower plant utilisation rates, but will continue performing on strong fundamentals.

AmBank Research said the chemical company expects its plant utilisation rate to be in the mid-90% level as the deferral of turnaround activities for the Gebeng plant from 1Q20 to 4Q20 could slightly moderate operations.

It registered a plant utilisation rate of 97% in 1H20 and 100% in 2Q20 due to lower plant maintenance activities.

AmBank Research maintained a ‘Buy’ recommendation on PetChem, with unchanged fair value of RM7.05.

MIDF Research revised downwards its earnings forecast for the group in FY20 by 28.7% to RM1.84 billion from RM2.85 billion previously, after assessing the impact from slow demand recovery due to Covid-19.

It also accounted for the potential continued sideways movement of crude oil price, turnaround at PetChem’s plants to be undertaken in 4Q20 which will reduce sales volume, and slow recovery in product prices.

It’s staying ‘Neutral’ on the group with an unchanged TP of RM5.85. Product prices recovery is expected to be slow despite the recent improvement in global oil prices.

“That said, we have a positive bias on the company given that its fundamentals remain intact and the demand from refineries in China and several regional countries have been encouraging,” MIDF Research said.

PetChem’s earnings fell to RM186 million in 2Q20 from RM1.12 billion a year ago due to lower Ebitda and lower income generated from fund placement.