Natural Gas Infrastructure Expansion Will Capitalize On Shift From Coal

Key Takeaways

• Expansion of power generation and natural gas infrastructure could increase future revenue and capacity utilization, leveraging the demand shift from coal to gas.
  
• Sustainable energy practices, carbon tax benefits, and efficient operations enhance net margins, while favorable forex and lower financing costs boost earnings.
  
• Elevated costs and foreign exchange fluctuations may reduce profit margins and profitability, with potential revenue impacts from decreased gas prices and increased maintenance expenses.

Catalysts

Engages in separating natural gas into components and storing, transporting, distributing, and selling such components to industrial utilities in Malaysia.

• Development of new power plants in Kimanis, Sabah, and Labuan is expected to commence commercial operations by March 2026, potentially increasing future revenue streams from the power generation segment.
  
• Anticipated demand surge for natural gas driven by retirement of coal plants and growth of energy-intensive data centers may lead to increased utilization of existing gas infrastructure and potential expansion projects, positively impacting future revenue and capacity utilization.
  
• Implementation of carbon tax and incentives for CCUS technology development announced in Budget 2025 could create new opportunities for PETRONAS Gas Berhad to capitalize on sustainable energy practices, enhancing their net margins through tax benefits and new revenue streams.
  
• Continued operational excellence and high plant efficiencies, especially in gas processing and transportation segments, may lead to maximized incentives and increased earnings, supported by strong reliability and efficient operations.
  
• Favorable foreign exchange movements and ongoing reductions in financing costs may lead to improved net margin and earnings, as demonstrated by the impact of settlement of USD lease liabilities and strong cash generation which facilitates future growth investments.

PETRONAS Gas Berhad Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PETRONAS Gas Berhad's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.6% today to 31.7% in 3 years time.
• Analysts expect earnings to reach MYR 2.2 billion (and earnings per share of MYR 1.11) by about December 2027, up from MYR 1.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as MYR 1.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.9x on those 2027 earnings, up from 18.1x today. This future PE is greater than the current PE for the MY Gas Utilities industry at 18.6x.
• 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 8.04%, as per the Simply Wall St company report.

PETRONAS Gas Berhad Future Earnings Per Share Growth

Risks

• Elevated costs of doing business, reflected by the increase in the Service Producer Price Index (SPPI), may negatively impact operating and project expenses, which could lead to lower profit margins.
  
• The future decrease in the Malaysia Reference Price (MRP) of gas could reduce revenue from the Utilities segment, impacting earnings.
  
• High levels of maintenance activities, coupled with inflationary pressures, have increased operating expenses, potentially reducing net margins.
  
• Fluctuations in foreign exchange rates, especially the potential weakening of the Malaysian ringgit against the U.S. dollar, may result in unfavorable currency movements that can adversely affect financial results and earnings.
  
• The planned increased maintenance and capital expenditures towards year-end could lead to higher depreciation and operational costs, potentially impacting overall profitability and returns.

Valuation

• The analysts have a consensus price target of MYR 18.34 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 MYR 20.3, and the most bearish reporting a price target of just MYR 16.75.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be MYR 6.9 billion, earnings will come to MYR 2.2 billion, and it would be trading on a PE ratio of 20.9x, assuming you use a discount rate of 8.0%.
• Given the current share price of MYR 17.06, the analyst's price target of MYR 18.34 is 7.0% 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.