Malaysia Energy Transition Will Drive CCUS And Infrastructure Progress

Key Takeaways

• Growth in Malaysia's gas infrastructure and energy transition initiatives positions PETRONAS Gas for sustained earnings and high utilization of core assets.
  
• Diversification into decarbonization and operational efficiencies are set to drive new revenue streams and support continued profitability.
  
• Regulatory and policy uncertainties, rising costs, and energy transition pressures threaten long-term earnings stability, asset utilization, and profitability across core business segments.

Catalysts

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

• Demand for gas infrastructure in Malaysia is poised to grow as the government accelerates its energy transition roadmap and prioritizes energy security, evidenced by new investments such as the upcoming third regasification terminal and the expansion of pipeline capacity-likely supporting long-term revenue and asset base growth.
  
• PETRONAS Gas is positioned to capture additional value as natural gas remains a "bridge fuel" supporting regional industrialization and clean energy efforts in Southeast Asia, underpinning continued high utilization rates across its core infrastructure and providing resilience to earnings.
  
• Participation in emerging areas aligned with Malaysia's decarbonization agenda-such as carbon capture, utilization, and storage (CCUS) using existing gas transport and processing assets-can open new, regulated revenue streams and enhance future profitability.
  
• Full subscription and strong utilization of existing regasification terminals, combined with expansion and upgrades, support recurring cash flows via stable, long-term take-or-pay contracts, sustaining high net margins despite recent cost and tariff headwinds.
  
• Operational efficiencies from recent digitalization, automation, and ongoing cost discipline are expected to uplift EBITDA margins and counteract inflationary pressures, boosting overall profitability in the coming years.

PETRONAS Gas Berhad Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PETRONAS Gas Berhad's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.3% today to 29.9% in 3 years time.
• Analysts expect earnings to reach MYR 2.0 billion (and earnings per share of MYR 0.99) by about September 2028, up from MYR 1.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as MYR1.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.6x on those 2028 earnings, up from 20.2x today. This future PE is greater than the current PE for the MY Gas Utilities industry at 16.7x.
• 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 8.45%, as per the Simply Wall St company report.

PETRONAS Gas Berhad Future Earnings Per Share Growth

Risks

• Ongoing and upcoming regulated tariff resets (such as under RP4) and negotiations with regulatory authorities create uncertainty on allowed returns and revenue from key segments; downward tariff adjustments already contributed to lower revenues and margins in recent quarters, directly threatening long-term revenue stability and net profit margins.
  
• Persistent cost pressures-including higher operational costs from new taxes (expanded SST), increased maintenance/capex needs (Putra Heights pipeline repair and replacement), and possible regulatory compliance-may compress free cash flow and profitability, especially if cost recovery via regulated tariffs is delayed or denied.
  
• The shift in Malaysia's electricity tariff structure, announced for 2025, is likely to lower utilities revenue and potentially increase operating costs, which could weigh on PETRONAS Gas Berhad's utility segment earnings and overall group margins in the medium to long term.
  
• Regulatory treatment and timing of unexpected capex (such as the major permanent pipeline replacement at Putra Heights) remain under negotiation; if some or all costs are not recoverable in the Regulated Asset Base (RAB), it would undermine long-term returns and ROIC on large infrastructure investments.
  
• Accelerating energy transition policies, including Malaysia's National Energy Transition Roadmap, promote renewables, battery storage, and decarbonization (CCUS), which may gradually erode gas growth prospects and utilization rates-potentially leading to asset underutilization and a structural decline in earnings for existing gas infrastructure over the long term.

Valuation

• The analysts have a consensus price target of MYR18.754 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 MYR21.81, and the most bearish reporting a price target of just MYR16.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MYR6.7 billion, earnings will come to MYR2.0 billion, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of MYR18.7, the analyst price target of MYR18.75 is 0.3% 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.