Listed in 1995, PETRONAS Gas Berhad (PETGAS) is a leading gas infrastructure and centralised utilities company in Malaysia. It receives and processes natural gas from PETRONAS and delivers them to customers in Malaysia and Singapore via its Peninsular Gas Utilisation pipeline.
Presently, PETGAS is worth RM35.6 billion in market capitalization and is one of the 30 constituents of the FTSE Bursa Malaysia Kuala Lumpur Composite Index. Here, I’ll bring an update on PETRONAS Gas’s latest financial results, growth plans, and valuation based on its current stock price. As such, here are 12 things to know about PETRONAS Gas before you invest.
1. For the last 12 months, PETGAS’s gas processing division made RM1.57 billion in revenue and RM631 million in gross profits. Revenue was directly contributed by stable remuneration from a 20-year gas processing agreement (GPA) with PETRONAS that comprises a fixed processing fee, and achieving 99% plant reliability in 2018.
2. For the last 12 months, PETGAS’s gas transportation division made RM1.35 billion in revenue and RM1.01 billion in gross profits. Revenue was directly contributed from the 20-year gas transportation agreement (GTA) with PETRONAS. The division achieved 99.98% in gas transmission reliability in 2018 and the commencement of the Sabah-Sarawak Gas Pipeline (SSGP) in November 2017.
3. For the last 12 months, PETGAS’s utilities division made RM1.29 billion in revenue and RM184 million in gross profits, a year-on-year increase of 11.6% and 21.9% respectively. This was contributed from revisions of fuel gas prices upwards on 1 January 2018 and 1 July 2018.
4. For the last 12 months, PETGAS’s regasification division generated RM1.20 billion in revenue and RM681 million in gross profits, a year-on-year Increase of 86.7% and 126.2% respectively. Growth was contributed largely by the commencement of operations of a new liquefied natural gas (LNG) regasification terminal at Pengerang Terminal in November 2017. Also, its growth has been supported by plant reliability of close to 100% in its existing plant at Sungai Udang, Melaka in 2018.
5. PETGAS achieved a compound annual growth rate (CAGR) of 6.10% in revenue, from RM3.58 billion in 2012 to RM4.81 billion in 2017. This was mainly due to the GPA and GTA, and higher sales from its utilities and regasification divisions. In the past 12 months, PETGAS made RM5.41 billion in revenue, a year-on-year increase of 16.2%. Its recent growth rate is higher as the company derived additional income from a new LNG regasification terminal in Pengerang Terminal from November 2017 onwards.
6. At first glance, it seems that PETGAS has been reporting weaker profits as shareholders’ earnings declined from RM2.08 billion in 2013 to RM1.79 billion in 2017, a 13.9% reduction over four years.
This may be one reason why PETGAS’s stock price has been dropping since 2014, from around RM24 in mid-2014 to RM18.40 presently. However, after a look at its financial statements, I learned that PETGAS recognised as much as RM1.27 billion in investment tax allowances from 2013 to 2015 due to the construction of the LNG regasification terminal in Melaka. These allowances artificially boosted PETGAS’s profits from 2013 to 2015, which makes it look like the company’s earnings fell thereafter. Removing the allowances ‘smooths out’ PETGAS’s figures.
Over the last five years, PETGAS has been growing its shareholders’ earnings at a CAGR of 5.0%, from RM1.41 billion in 2012 to RM1.79 billion. We have a situation where the price of a stock declined despite its normalised earnings increasing. For the past 12 months, PETGAS made RM1.98 billion in shareholders’ earnings, a year-on-year increase of 13.0%.
This was also due to contributions from its new LNG regasification terminal. PETGAS has averaged 14.43% in return on equity from 2013 to 2017. Based on earnings for the past 12 months, PETGAS recorded 15.20% in ROE, slightly higher compared to its 5-year average.
7. From 2013 to 2017, PETGAS generated RM12.7 billion in operating cash flows, raised RM1.51 billion in net long-term borrowings, and received RM427.6 million in interest and dividend income. PETGAS has utilised these cash inflows to pay RM7.86 billion in capital expenditures and RM6.21 billion in dividends to its shareholders. PETGAS has also grown its cash balance from RM912.1 million in 2013 to RM3.36 billion as at 3Q 2018. PETGAS generates strong cash flows and has the ability to invest for further growth and continuously pay dividends to reward existing shareholders.
8. The second term of PETGAS’s 20-year GPA with PETRONAS started on 1 January 2019. The fixed reservation charge payable to PETGAS for processed gas was revised to RM2,524 per MMSCFD (million standard cubic feet per day), from RM2,330 per MMSCFD. This term ends on 31 December 2023.
9. PETGAS is nearing full completion of the construction of its Air Separation Unit at Pengerang Terminal. Upon completion, it will be able to supply 41,000 Nm3 of oxygen and 25,900 Nm3 of nitrogen mainly to industrial customers within the Pengerang Integrated Complex. It is expected to commence its operations in Q4 2018.
As at 27 February 2019, PETGAS is currently trading at RM18.24 per share.
10. P/E ratio: PETGAS made RM1.98 billion in shareholders’ earnings or RM1.009 in earnings per share. Hence, its current P/E Ratio is 18.1, the lowest in five years.
11. P/B ratio: As at 30 September 2018, PETGAS reported net assets of RM6.58 a share. Thus, its current P/B Ratio is 2.7, its lowest in five years.
12. Dividend yield: Over the last 12 months, PETGAS paid a dividend per share of 69 sen. Thus, its current dividend yield is 3.78% assuming PETGAS maintain its dividend. PETGAS’s current yield is at its highest over the last five years and comparable to fixed deposit rates offered by most local banks in Malaysia.
The fifth perspective
In summary, PETGAS has delivered sustainable growth in revenue, profits, cash flows from operations, and dividends to shareholders. It has improved its financial results over the last 12 months as a result of the contribution of its new LNG regasification terminal at Pengerang since end-2017.
Moving ahead, the upward revision in fixed reservation charges for its GPA with PETRONAS marks a positive start to PETGAS for 2019 as PETGAS’s revenue and profits are substantially derived from the GPA. Meanwhile, the ASU in Pengerang will start to contribute beginning in 2019.
In terms of valuation, PETGAS is trading at its lowest P/E and P/B ratios over the last five years. Dividend yields at 3.78% are also at their highest. This suggests that PETGAS is currently undervalued compared to its historical valuation over the last five years.
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