By Stella Goh – As published in Inve$t Malaysia 24 April 2020 issue
Overview
Petronas Gas Berhad (PETGAS) is a Malaysia-based gas infrastructure and centralised utilities company founded in 1983 and is headquartered at PETRONAS Twin Towers, Kuala Lumpur. PETGAS is primarily involved as the world’s largest gas pipeline company that specializes in processing and transporting of natural gas via Peninsular Gas Utilisation (PGU) pipeline network to PETRONAS’ customers in Malaysia and Singapore.
PETGAS was listed in Main Market of Bursa Malaysia on 4 September 1995. With the liberalization of Malaysian gas market, the company foresees exciting new developments ahead for the industry and accelerating momentum towards being a more competitive solutions provider in this new era.
PETGAS’s subsidiaries include Pengerang LNG (Two) Sdn Bhd, Regas Terminal Sg Udang Sdn Bhd and Regas Terminal (Pengerang) Sdn Bhd.
Business Model
PETGAS is primarily involved in four main core businesses namely Gas Processing, Gas Transportation, Utilities and Regasification.
In the processing business the upstream natural gas from offshore gas fields in the East Coast of Peninsular Malaysia is processed for its customers in the power-generation & petrochemical industries. The 6 plants in Terengganu are at two complexes namely Gas Processing Kertih (GPK) and Gas Processing Santong (GPS). With a combined capacity of over 2,000 million standard cubic feet per day (mmscfd) of feedgas, the plants have the capability to process and produce salesgas, ethane, propane and butane.
As for its gas transportation business, the processed gas (as a low-carbon fuel and the cleanest of fossil fuels in power generation) is carried through its 2,623km Peninsular Gas Utilisation (PGU) pipeline network across Peninsular Malaysia with a capacity to transport up to 3,500mmscfd of gas to end customers under multi-year agreements with Petroliam Nasional Berhad (PETRONAS).
The company through its Gas Processing & Utilities (GPU) Division provides utilities such as electricity, steam, industrial gases like oxygen & nitrogen, de-mineralised water, raw water, cooling water and boiler feed water.
Its Gas Transmission and Regasification (GTR) Division operates and maintains the offshore Liquefied Natural Gas (LNG) Regasification Terminal in Sungai Udang, Melaka (RGTSU) and the onshore LNG Regasification Terminal in Pengerang, Johor (RGTP). The facilities receive vessels carrying LNG from around the world and offer a wide range of services including LNG regasification, LNG reloading and Gassing Up Cooling Down.
Financial Review
PETGAS has achieved highest dividend growth of 13.89% from RM0.72 in FY2018 to RM0.82 in FY2019. Based on 3 years of CAGR basis, PETGAS has a dividend growth of 9.77%.
PETGAS has declared interim dividends of 16sen per share for Q1 and Q2 and upped it to 18sen per share in Q3. For Q4, the board has approved a final dividend of 22sen and a special dividend of 10sen which brought its total dividend for the year to 82sen per share, translating into RM1.6 billion of total dividend declared. PETGAS has a higher dividend payout ratio in tandem with the higher dividend declared.
PETGAS had an increase of gross profit margin from 44.55% in FY2017 to 46.12% in FY2018. The gross profit margin in FY2019 decreased by 5.18% compared to previous year mainly due to the Incentive-Based Regulation (IBR) on its regulated Gas Transportation and Regasification business segments.
Although the gas transportation and regasification on tariffs were regulated, PETGAS was compensated by higher remuneration via the second term of the 20-year Gas Processing Agreement with PETRONAS commencing on 1 January 2019, which influences its operating targets and planned expenditure over the next five years. Even though the Gross Profit Margin achieved in FY2019 is the lowest PETGAS was still able to achieve more than 30% of gross profit margin over the past 3 years indicating the profitability of its core business activities without taking into consideration its indirect costs.
PETGAS has achieved the highest Return of Equity (ROE) in FY2019 from 13.96% in FY2018 to 14.61%. Based on 3 years CAGR basis the company’s ROE has grown 0.18%.
The increase in ROE was mainly due to the company being well managed and is making good profit relative to shareholder’s capital and reflects the management’s effectiveness and capability in deploying its resources.
PETGAS’s quality of earnings had increased from 1.578 times in FY2017 to 1.761 times in FY2018 but decreased in FY2019 to 1.631 times as compared to FY2018. Inspite of this PETGAS was still able to maintain its quality of earnings at more than 1 over the past 3 years indicating that the company’s business is conservative in its approach to income recognition.
Based on the computation on liquidity ratio, PETGAS has a current ratio of 5.169 times in FY2019 compared to 7.042 times in FY2018. Even though the current ratio in FY2019 has decreased, it indicates that the company does not face any liquidity issue as it is capable of paying back its liabilities of (RM989.528 million) if any unforeseeable circumstances occur. PETGAS is able to do so by using the current assets such as trade and other inventories, trade and other receivables, tax recoverable, cash and cash equivalents amounting to RM5.114 billion. However this may also indicate that the company is not efficiently using its current assets or its short-term financing facilities.
PETGAS has a growing Total Debt to Equity ratio of 0.294 times in FY2019 as compared to 0.256 times in FY2018. Even though the Total Debt to Equity ratio of PETGAS has increased in FY2019, the company still able to pay off its debt obligations as the Total Debt to Equity ratio based on 3 years is lower than 0.5 times which indicates that the company has less than half of liabilities compared to its equity. This may also indicate that PETGAS has a lower risk.
Cash Flow Statement
The net cash from operating activities has provided a positive cash flow of RM3.357 billion in FY2019 as compared to RM3.311 billion in FY2018 indicating that the company is healthy and has enough cash to use for business expansion.
The net cash from investing activities in FY2019 (-RM1.098 billion) in FY2019 was mainly due to the purchase of Property, Plant and Equipment (RM1.094 billion), increase in investment in a joint venture (RM31.031 million) and term loan to a joint venture (RM7.226 million). The negative cash flow indicates that the firm is investing in its business for growth.
The net cash from financing activities in FY2019 (-RM1.850 billion) was mainly due to dividend paid to shareholders (RM1.425 billion), interest expense paid (RM229.525 million), payment to non-controlling interests on redemption of shares (RM73.320 million), repayment of lease liabilities (RM56.579 million), repayment of loan from corporate shareholder of a subsidiary (RM52.938 million) and dividend paid to a non-controlling interest (RM19.690 million).
Prospect and Challenges
PETGAS has announced that the Government via the Energy Commission (EC) has approved new gas tariffs under the Incentive-Based Regulation for two years starting from 1 January 2020 until 31 Dec 2022. The tariff has been set at RM1.129 per gigajoule, RM3.455/GJ and RM3.485/GJ respectively for its Peninsular Gas Utilisation facility (PGU), Regasification Terminal Sg Udang in Melaka and Regasification Terminal Pengerang in Johor.
According to the Managing Director and Chief Executive Officer of PETGAS, the company will continue to record excellent operational performance whilst making several significant steps towards securing its future revenue streams and becoming an integrated energy solutions provider. These include acquisition of new customers for steam and electricity for its utilities in Gebang as well as the introduction of new ancillary services at the company’s regasification terminals.
PETGAS will continue to focus on growing its business as it steps up the new four-year strategy known as R2 Game Plan: 301Q99 Pushing Forward which will help to ensure a sustainable safe, reliable, and efficient operations. A few projects initiated in 2019 will be completed and commissioned in 2020 such as the Liquefied Natural Gas (LNG) bunkering project at Regasification Terminal Sungai Udang (RGTSU) and LNG truck loading service at Regasification Terminal Pengerang (RGTP).
The new propane and butane import facilities in Kemaman that were completed in November 2019 will also enhance the company’s revenue beginning from FY2020. The company also believes it is well-positioned to participate as a key player in the power supply market which is being opened under MESI 2.0.
Rating System
Return on Equity (ROE) = Average
Revenue [3 years CAGR] = Average
Net Earnings [3 years CAGR] = Average
Basic Earnings per Share (EPS) [3 years CAGR] = Average
Interest Coverage = Good
Quality of Earnings = Average
Price Over 3 Years
Insight
Based on the calculation of Discounted Earnings Model, PETGAS has an intrinsic value of RM9.78. The current share price of PETGAS is RM15.38 which makes it an overvalued stock (as at 23 April 2020). PETGAS has a beta of 0.756 (500 days) indicating that the share price is less volatile than current market. Based on the computation of Compound Annual Growth Rate (CAGR), PETGAS has an expected market return of 0.83%.
In conclusion, PETGAS may look attractive to investors as a dividend growth stock. With the consistent dividend payout policy, it will help to generate investor confidence. Its prospect remains bright as it secures more projects that will provide continued growth and accrue long-term benefits for shareholders. However investors still need to consider a host of other factors apart from dividends when analysing a company.
Disclaimers
The research, information and financial opinions expressed in this article are purely for information and educational purpose only. We do not make any recommendation for the intention of trading purposes nor is it an advice to trade. Although best efforts are made to ensure that all information is accurate and up to date, occasionally errors and misprints may occur which are unintentional. It would help if you did not rely upon the material and information. We will not be liable for any false, inaccurate, incomplete information and losses or damages suffered from your action. It would be best if you did your own research to make your personal investment decisions wisely or consult your investment advisor.