AI And Infrastructure Developments Will Shape Malaysia's Energy Future

Key Takeaways

• Strategic investments in infrastructure projects and energy infrastructure position PGB for revenue growth in energy production and gas transportation.
  
• Focus on sustainability and efficiency, along with potential favorable tariff adjustments, may improve net margins and future earnings.
  
• Rising operating costs, unfavorable joint venture dynamics, and regulatory risks could challenge future revenue and profit margins for PETRONAS Gas Berhad.

Catalysts

Engages in separating natural gas into its components and storing in Malaysia.

• PETRONAS Gas Berhad (PGB) has made significant capital investments in infrastructure projects like the 100-megawatt power plant in Kimanis and the Labuan power plant, expected to drive growth in revenue from energy production.
  
• The company's strategy of leveraging its right-of-way land and co-generation capabilities for new business opportunities and energy infrastructure is likely to enhance future revenue streams.
  
• With the expectation of increased demand for gas and electricity to support Malaysia's growing data center industry, PGB is poised to benefit from higher gas transportation and regasification revenues.
  
• PGB's ongoing investment in sustainability and efficiency improvements, such as AI-based grid management and digital automation in utilities, can enhance net margins through cost reductions and higher operational efficiency.
  
• The expectation of favorable tariff adjustments and positive impacts from reduced operating costs due to lower internal gas consumption and optimized resource utilization are likely to improve future net earnings.

PETRONAS Gas Berhad Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PETRONAS Gas Berhad's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.1% today to 29.0% in 3 years time.
• Analysts expect earnings to reach MYR 1.9 billion (and earnings per share of MYR 0.97) by about April 2028, up from MYR 1.8 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as MYR2.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.0x on those 2028 earnings, up from 18.0x today. This future PE is greater than the current PE for the MY Gas Utilities industry at 15.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.34%, as per the Simply Wall St company report.

PETRONAS Gas Berhad Future Earnings Per Share Growth

Risks

• The decline in joint venture profits indicates potential challenges in collaborations, impacting earnings and profit before tax due to lower contributions from these ventures.
  
• Rising operating costs across all segments, including maintenance and depreciation expenses, could strain gross profit margins and affect net margins.
  
• Volatility in foreign exchange rates and the impact of USD lease liabilities could lead to increased financing costs and affect overall financial stability and earnings.
  
• The regulatory framework and the end of the RP2 term might pose a risk if new terms are less favorable, affecting future revenue stability and projections.
  
• A continued decrease in revenue from the utility sector due to lower product prices might impact overall revenue growth if these trends persist.

Valuation

• The analysts have a consensus price target of MYR18.24 for PETRONAS Gas Berhad based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MYR20.3, and the most bearish reporting a price target of just MYR16.75.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MYR6.6 billion, earnings will come to MYR1.9 billion, and it would be trading on a PE ratio of 24.0x, assuming you use a discount rate of 8.3%.
• Given the current share price of MYR16.66, the analyst price target of MYR18.24 is 8.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.