PETGAS: Earnings Fall Short on Segment Weakness, But Structural Growth Prospects Underpin ‘Buy’ Rating

An investment bank has maintained its “Buy” recommendation on a major energy player, despite the company reporting a core net profit for FY25 that fell short of both the bank’s and consensus estimates. The firm’s FY25 core earnings stood at RM1.69 billion, a 7% year-on-year decline, with the fourth quarter contributing RM339.5 million, down 23% year-on-year. This performance represented 91% of the bank’s forecast and 93% of street estimates.

Performance Review

The underperformance was primarily attributed to significant weakness in the gas transportation segment, which saw its gross profit plummet by 71% year-on-year in 4QFY25. This decline was a result of higher operating expenses and increased preventive maintenance activities aimed at addressing emerging operational risks, implying softer utilization rates.

Conversely, other segments demonstrated resilience and growth. The gas processing segment recorded a 20% year-on-year increase in gross profit, driven by lower operating expenses. The utilities segment also improved, with a 3.9% year-on-year rise in gross profit, benefiting from lower fuel gas costs despite reduced RP4 electricity tariffs. The regasification segment was a strong performer, achieving a 21% year-on-year increase in gross profit, bolstered by higher revenue from LNG storage services at Pengerang Johor, which commenced operations in August 2025.

The company declared an interim dividend of 22 sen per share, bringing the total FY25 dividends to 72 sen per share, with a dividend payout ratio of 82%.

Outlook and Strategic Initiatives

The investment bank has revised down its FY26F-27F net profit estimates by 8-10% to account for more conservative margin assumptions. The recently announced RP3 framework indicates base tariffs for the PGU and RGTSU segments will increase by 12.5% and 2.5% respectively, partially offset by marginal reductions in C-Tariff (-0.4%) and RGTP (-0.7%). The bank awaits further details on the drivers of these higher tariffs, particularly whether they are linked to regulated capital expenditure expansion, which would positively impact regulated earnings. The pipeline fire incident in April 2025 could also lead to potentially higher capital expenditure for asset integrity maintenance.

Despite the earnings setback, the firm remains strategically positioned as a dominant player in Peninsular Malaysia’s gas supply infrastructure. It is expected to capitalize on the country’s energy transition, specifically the coal-to-natural gas replacement trend, with up to 60% of coal power generation capacity expiring between 2029-33. The company is actively pursuing growth opportunities, including collaborations to develop 100MWW CCGT power plants in Kimanis (RM700 million capex, target COD March 2026) and 120MW CCGT power plants in Labuan (RM1 billion capex, target COD January 2028). Additionally, it aims to capture opportunities in Carbon Capture and Storage (CCS) within its existing infrastructure.

Recommendation

The investment bank maintains its “Buy” rating for the company, albeit with a slightly revised SOP-derived target price of RM20.32 (down from RM20.58 previously). The recommendation is underpinned by the firm’s strategic role as a key upstream proxy to the energy transition, its position as the largest gas supply infrastructure owner, and decent dividend yields projected at 4.3%-4.6% throughout the forecast horizon, supported by long-term contracts and regulated businesses.