PETRONAS Gas Berhad (PETGAS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the PETRONAS Gas Berhad analyst briefing for quarter ended 30 June 2020. [Operator Instructions] I would now like to hand the conference over to Izan, Investor Relations. Please go ahead.

Thank you, operator. [Foreign Language] Good morning, everyone. Welcome to PETRONAS Gas Berhad analyst briefing for quarter ended 30 June 2020. My name is Izan from Investor Relations. Thank you for joining our session today. With us from PGB, we have Encik Kamal Bahrin Ahmad, Managing Director and CEO; Puan Shariza Sharis M. Yusof, CFO; and Encik Abdul Razak Saim, Head of Business Development and Commercial. We will start today's session with the presentation to be followed by Q&A. For reference, our financial results is available at both Bursa Malaysia and PGB website. The presentation material for today's analyst briefing is available at our website and also at the webcast host platform. Without further ado, I'll hand over to Encik Kamal for the highlights. Encik Kamal?

Thank you, Izan. [Foreign Language] Good morning to all, [Foreign Language] to all our Muslim analysts. Okay, thank you for joining us today. I'm pleased to report that PETGAS has continued to sustain our operation and also our financial performance during the first half of 2020 despite the COVID-19 and also the Movement Control Order, limiting many businesses from Malaysia and also around the globe. In the second quarter of 2020, we saw several relaxation on the guideline of MCO, which allows more businesses to resume their operation and thus, regenerating economic activities. For PETGAS, our plant and facilities have remained running since day 1 of our MCO. Our focus remains to ensure reliable delivery of gas supply to the entire nation as well as the safety of our staff and also our contractors. Operationally, we sustained high level of reliability across all our business segments and also achieved our target incentive. Commercially, we are backed by our long-term agreement with PETRONAS for Gas Processing, Gas Transportation and also Regasification business. For the Regulatory Period 1, or RP1, tariff under Third Party Access, which have seen set for the next 3 years, also assure us of our steady earnings in the next 3 years. On projects, those that are already approved, such as our LNG bunkering at our Regas Terminal in Sungai Udang, our LNG trucking at our Regas Terminal in Pengerang and also the natural generation unit at Kerteh will continue as per plan. Looking at the financials for the quarter ended 30 June 2020. PETGAS recorded MYR 1.4 billion revenue, comparable but slightly better than both quarter 1 2020 as well as quarter 2 2019. This is mainly due to higher revenue from our regas business which offset lower revenue from the Utilities segment. The higher regas revenue was from the higher tariff at Regas Pengerang while the lower Utilities revenue was from lower electricity sales volume. Gross profit was higher at MYR 675 million, mainly driven by lower operating costs. PAT, or profit after-tax, was in line at MYR 574 million as gross profit was further positively affected by unrealized foreign exchange gains, coupled with higher share of profit from our JV company. Looking at our half year performance. Revenue was 2% higher at MYR 2.8 billion derived from our Regasification, Gas Transportation and also our Gas Processing businesses. Gross profit was also higher at MYR 1.28 billion with lower operating costs. PAT, however, was 12% lower due to unrealized loss on calculation of our USD liabilities. More details on financial will be presented by Shariza, our CFO, right after this. Okay. Moving on, I will go through our operation for next few pages. First, let me start with our Gas Processing business, which continue to sustain its good performance. We maintained our OEE level similar to quarter 1 2020 and also better than quarter 2 last year. We also achieved 100% reliability, which demonstrates our commitment to the customers. As the business continue to operate even during MCO, we achieved MYR 41.4 million of our performance incentives year-to-date. These incentives cover performance-based structure and also additional internal targets and also internal gas consumption. Next, we move to the Gas Transportation as well as Regasification segment. We continue to deliver our commitment towards ensuring the security of gas supply to the nation coming from these 2 business operations. In the first half of year 2020, pipeline network reliability was close to 100%, and we delivered an average of 1.9 billion asset -- standard cubic feet per day of sales gas to our customers. For the Regas business, both our Regas Sungai Udang as well as Regas Pengerang started OEE at 100 percent-ish. Within this 6-month period, Regas Sungai Udang received a total of 9 LNG cargoes while Regas Pengerang received 15, 1-5, LNG cargoes, making a total of 24 cargoes received by these 2 terminals. Okay. Now we move to Utilities business. Our electricity, steam as well as our industrial gases plant continue to fulfill customer demand with 100% product delivery reliability recorded across all products. During the period, we met all our customer demand as measured by our product delivery reliability, or better known as PDR. However, the volume of our electricity, steam as well as the industrial gases were lower compared to the last year -- compared to last year in 2019. And I guess that's all for operational performance. And I will now hand over to Shariza for our financial performance. Thank you.

Thank you, Encik Kamal. [Foreign Language] A very good morning to everyone. If I can refer everyone to Slide 14 for the financials. We will start with segments, in particular, with Gas Processing. So for Gas Processing, against preceding quarter, quarter 1 2020, revenue for the quarter remained comparable at MYR 430 million. Gross profit improved by 12% to MYR 250 million as the higher revenue was supported by lower operational and depreciation expense. Against corresponding quarter, quarter 2 2018, segment revenue was also comparable. Segment results improved by 15% due to lower depreciation and maintenance costs, coupled with higher-performance incentives, reflecting our efficient internal gas consumption, IGC, for plant operations. We also began recording a new revenue stream for LPG importation and exportation services at our Tanjung Sulong Export Terminal, Terengganu, which was commissioned last year. For results against the corresponding period, the first half of 2019, revenue improved slightly by 1% at MYR 860 million on higher IGC incentive, coupled again with the new revenue stream from the LPG importation and exportation services. Segment results rose by 14% to MYR 472 million on lower depreciation and maintenance costs. Moving on to Gas Transportation on Slide 15 -- or Page 15. Under the incentive-based regulation, or IBR, our Gas Transportation, or GT, segment had adopted the RP1 tariff of MYR 1.129 per gigajoule for the PGU pipeline network. This is higher compared to pilot tariff -- Pilot Regulatory Period tariff of MYR 1.072 per gigajoule. The higher RP1 tariff follows the inclusion of IGC cost recovery, which is a pass-through cost. Prior to RP1, all these IGC costs were borne by the shipper. So in terms of the results, comparing with quarter 1 2020, revenue remained comparable at MYR 292 million. Our gross profit saw an improvement by 10% to MYR 207 million as we recorded lower operating expenses during the quarter. Against the corresponding quarter, quarter 2 2019, revenue remained comparable because we had the higher RP1 tariff mitigating the lower revenue following the transfer of our Sabah-Sarawak Gas Pipeline and Sarawak -- our Sarawak gas distribution assets to PETRONAS Carigali and third parties, respectively. Gross profit was lower by 4% from the lower net RP1 tariffs, excluding IGC, as well as lower O&M. RP1 tariff, net of IGC, was lower compared to last year, which was the PRP, mainly due to the transitioning of our regulated asset base from depreciated replacement cost to net book value. Against corresponding period, similar reasons to corresponding quarter, our revenue was level at MYR 585 million, while segment results was 5% lower at MYR 396 million. Next, on to Regasification on Page 16. The Regasification segment also adopted new tariffs under IBR, RP1 tariff of MYR 3.455 per gigajoule for RGTSU, Sungai Udang; and MYR 3.485 per gigajoule for RGT Pengerang. In 2019, tariffs were MYR 3.518 per mmBtu and USD 6.637 per mmBtu, respectively, under the Pilot Regulatory Period. Similar to Gas Transportation, the RP1 tariffs are higher on a comparable unit basis, following the inclusion of IGC cost recovery. Again, this is a pass-through cost. Prior to RP1, this was borne directly by the capacity user. In addition, for RGT Pengerang, the tariff was higher due to the inclusion of jetty leased asset under the regulated asset base for this year. So financial performance-wise, against the preceding quarter, quarter 1 2020, revenue was steady at MYR 350 million, while segment results were 2% higher at MYR 168 million on lower operating costs. Against corresponding quarter, quarter 2 2019, revenues saw an improvement by 15% (sic) [ 14% ], in line with higher tariffs. Our gross profit increased by 6%, attributable to higher contribution from RGTP, offset by higher operational expenses, mainly relating to Utilities. Similarly, for the half year results, against corresponding period, we saw an improvement in revenue by 15% (sic) [ 14% ] to reach MYR 695 million, while segment results were 6 -- 5% higher at MYR 333 million. Last, but not least, for Utilities segment. Comparing against the preceding quarter, quarter 1 2020, we saw revenue remaining level at MYR 328 million. While segment gross profit stood at MYR 50 million, higher by 52% due to lower depreciation and utilities cost of sales, in line with production. For results against quarter 2 2019, corresponding quarter, revenue was lower by 7%, attributable mainly through lower electricity sales with lower off-take by customers during the quarter. While segment gross profit was lower by 15%, in line with lower contribution from electricity sales. For the 6 months, similar trending, we had segment revenue lower by 7% at MYR 656 million, while segment gross profit was lower by 21% at MYR 83 million. Moving on to the group level results, which is on Page 18. Against preceding quarter, quarter 1 2020, we saw revenue remaining steady at MYR 1.4 billion as we sustained revenue from all our business segments. Gross profit improved by 11% to MYR 675 million on the back of lower operating costs by Gas Processing, Gas Transportation and Utilities business segment. Profit after-tax rose by 65%, up to MYR 574 million on unfavorable exchange rate movements as well as a higher share of profit from joint venture, in addition to higher gross profit. During the quarter, the group recorded unrealized ForEx gain on translation of USD-denominated liabilities amounting to MYR 20.5 million as the ringgit strengthened against the USD. In comparison, we had -- we recorded a loss on translation of MYR 152 million in the preceding quarter. Against the corresponding quarter, quarter 2 2019, our group revenue was sustained following higher revenue from Regasification, which offset lower revenue from Utilities. Gross profit also rose by 4% as revenue was supported by lower operating costs. PAT registered an 11% improvement, similar reasons, due to the unrealized ForEx gain. While year-on-year, against first half of 2019, group revenue and gross profit remained resilient, profit after-tax, however, was 12% lower, again, due to the unrealized ForEx loss of MYR 131.4 million for the 6 months compared to a gain of MYR 52.9 million in the corresponding year's 6 months. Moving on to the balance sheet. Our balance sheet remains robust with over MYR 19 billion of total assets as at 30 June 2020 compared to the position as at 31 December 2019. Cash and cash equivalents remain very healthy, over MYR 4.2 billion. Also, the group division of segmental assets remained somewhat similar to last quarter. Moving on to dividends. As you are aware, the Board has declared and approved a second interim dividend of MYR 0.16 per share and a special interim dividend of MYR 0.50 per share, amounting to a total of MYR 1.31 billion. These will be payable on 1 October 2020. The second interim dividend demonstrates our continued commitment to ensure sustained level of returns to our shareholders despite these challenging times. The special interim dividend was declared and approved on strong quarter 2 business results and is also very much in line with the current capital structure review exercise being undertaken by the group. The intent is to position PGB as a competitive infra player under TPA or IBR -- and IBR. So with that, we end the financial section. I will now pass the line over to Encik Kamal to share on some company updates.

Thank you, Shariza. Moving to our company update. Overall, PETGAS has managed to sustain our performance despite the COVID-19 pandemic and also MCO restriction, as what I mentioned earlier on. As such, we expect stable operations across the business for this year. As the incentive-based regulation, IBR, become part of the new norm, we expect a steady earning from our regulated business for the next 3 years. We will continue our capital commitment on approved projects, of which some of them are due for commissioning within this year. Moving on. PETGAS look forward to further improve the utilization of our facilities and also drive efficiency. Last month on -- to be exact, on 27 July 2020, PETGAS held our inaugural Third Party Access Engagement Series with Shippers, recurring and also the potential new shippers for our facilities. The event was attended by Suruhanjaya Tenaga, ST, registered shippers, customer and other parties who are keen to take part in national gas market. During the session, as informed via our website recently, there is a partial capacity transfer available from the anchor shipper to interested shippers and also customer at our Regas Terminal Sungai Udang beginning 2021 until 2022, basically, the remaining RP1 period. The offer for partial capacity transfer is part of PETRONAS' commitment to support the Third Party Access system, while the incoming third-party LNG cargoes and consequent traffic increase at our Peninsular Gas Utilisation, or PGU, pipeline envisions to spur the domestic gas demand from the industries and also will benefit PGB as well. Okay. That's all for now. Let's move on to our Q&A.

[Operator Instructions] The first question comes from Alex Goh with Am Investment Bank.

Congratulations for the strong set of results. I've got 3 questions. The first one is regarding your Utilities segment. The demand has fallen. I just -- we just want to -- I just want to have a feel. Is this just a temporary situation? Or should we expect a rebound in the second half? And what was the reason for the drop for the demand? Was it because of the clients closing down during the MCO? Or were some of those clients completely shut down or financially in problem -- with problems? Yes.

So Alex, okay, there are 2 parts of the reason -- a 2-part reason why we see lower Utilities. One, because during MCO, some of our customers are taking less because the demand is lower. But of course, after -- even now, we saw the demand picking up just on this one segment. But in other segments, it's mainly around the power, electricity. For power, we have our captive market, right, and we have the agreement, long-term agreement, with the captive market. And so they have a take-or-pay. But sometimes, any asset, we can sell to Tenaga, right? Of course, during MCO, Tenaga also had to cut their demand. That's one. Secondly, also, Tenaga, they are having, I'll call it, a lower fuel mix, which is coal. And so that's why it's difficult for us to compete now, partly under the current low demand. That's why we can see a lower intake of Tenaga. Basically, we're not able to export our assets to Tenaga as much as we used to export before. So I see -- and so far, we don't see any pickup on this partner. So in short, it's 2 reasons. And the first reason we see the pickup after the recovery of fuel. The other one will be more longer term. But also we have some, what I'll call, strategy on how to be competitive. So I did mention we continue to drive efficiency on that segment. Does that answer your question, Alex?

Yes. That means the other services other than electricity, I mean the steam and the other -- industrial gases, you are seeing pickup. Is it after the MCO?

Yes, yes. Yes, a pickup. Yes. If I can -- I want to go slightly technical because the demand -- basically, the demand of power was cut by half during the peak of MCO. You know that our Eastern supply to PCG is related to this power, right? It's -- power demand is low and also then Eastern also [ pickup ] to our, call it, customer, PCG, also low. So the power -- the pickup low, and so they're taking our [ efficiency ] lower. So now -- so it is [ much better ], so we can see it's coming up.

Okay. Right. My second question is regarding what Shariza mentioned earlier about optimizing our balance sheet structure in order to be competitive against other infra players. What sort of gearing levels are you looking at or comfortable with given the fact that you're now net cash currently?

Yes. I mean without being too specific, we are looking at the right mix between equity and debt. I mean at this particular point of time, there's not much that we can share, but we will announce if there's anything that needs to be announced. Generally, if you look at the guideline, right, in terms of the IBR or TPA, the ST uses a debt of about 55%. So that might give some indication, yes.

Okay. Great. And that brings me to my third question, which is related to the gearing. So given the fact that you've paid a special dividend and -- should we expect much higher dividend payout? Given the fact that now, on your balance sheet, you're looking at a potentially higher gearing level, should we expect high -- much higher dividend payout over the next few quarters and in looking into this year?

Yes. Again, we're not able to specifically comment or commit. I think the level of dividends, as far as the usual ordinary dividends, as we mentioned, that target is to sustain it to similar levels as last year. But as we continue to look at our capital structure, our balance sheet, that's something -- yes, that will depend on what happens in the next couple of months, Alex. So expect it to be a little bit -- yes, I don't think it's in our position to see that at this particular point of time. But as we said, that exercise is ongoing, to look at the balance sheet, yes.

Okay. That's wonderful. Could you give us a bit of guidance on your CapEx going for the rest of this year? Was there any delays in terms of CapEx because of MCO? And should we expect that some of those spending this year to fall into next year? And could you give us a bit of guidance on 2021 CapEx guidance as well?

Right. Yes. As Encik Kamal mentioned, some activities were affected, and that was not just us, maybe because there were some restrictions in terms of getting the contractors in and so on. So for the first half, there was a little bit of a -- sort of like a downtick. So we were talking about just about MYR 450 million -- MYR 460 million in terms of CapEx spend. For the remainder of the year, we do think it will -- from the way things are looking at this point of time, it will exceed MYR 1 billion. But again, things are very volatile out there. But based on what we can see, MYR 1 billion -- just over MYR 1 billion would be the guidance for this year, similar level again for next year.

Yes. Okay. Could you just refresh me, last year, how much was your CapEx? I mean was it around that -- the same one for this year also?

Last year was slightly higher. It was about MYR 1.2 billion. But again, this year, there were some rejuvenation projects, which is still ongoing. But there's slightly less expenditure this year. One is, just in terms of level of activities, it's lower. The other thing, again, there's some optimization as well and also restrictions as far as the projects are concerned. Although we are trying -- we are focused on actually getting all these projects to be delivered on time.

Alex, sorry, since Shariza was not able to give as much detail to everyone, I just would add up to my earlier response to you. I think it's an obvious factor, it's not that we do not take seriously as it relates to utility. But it's not -- utility contributed about 7% of the profit, on the total profit of the group, just to give a context, it is obvious context. But we do not take it, I mean, lightly. Yes, we will continue to pursue our business. Thanks, Alex.

[Operator Instructions] There are no further telephone questions at this time.

Yes. Okay. I'll read one question from the webcast, Siew Ngo from CIMB. May I know the group adjusted for the -- has the group adjusted for the revenue cap under IBR RP1? And as of the first half of 2020, is it over recovery or under recovery? Can I ask Encik Razak to answer the questions?

Yes, Razak here of the business section. I think if I can understand the question, you would like to know the RAB from Regulated Period 1, is it? Can I just rehear on that?

How's the performance of this first half? Is it overrecovery or under recovery based on this tariff? Have we adjusted revenue under IBR RP1?

The -- it's not being adjusted yet. It is in the process. The RP1 would be adjusted during RP2 session -- RP2 period. So I think it is not being adjusted yet.