PETRONAS Gas Berhad (PETGAS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the PETRONAS Gas Berhad Analyst Briefing for Quarter Ended 31st December 2021. [Operator Instructions] And now I'd like to turn the conference over to Izan Ishak, Head, Investor Relations of PETRONAS Gas Berhad. Thank you. Please go ahead.

Thank you, operator. Assalamualaikum and good evening, everyone. Thank you for joining our session today for PETRONAS Gas Berhad's analyst briefing for quarter ended 31st December 2021. My name is Izan from Investor Relations. With us from PGB, we have Encik Abdul Aziz Othman, Managing Director and CEO; Puan Shariza Sharis Mohd Yusof, CFO; and Hisham Maaulot, Head of Business Development and Commercial. We will start the session with highlights, company performance, updates, then followed by Q&A. For reference, our financial results is available at both Bursa Malaysia and PGB website. The material [ copies of ] briefing is also available at our website and the webcast host platform. Without further ado, I'll hand over to Encik Aziz for the highlights. Encik Aziz?

Thank you, Izan. Assalamualaikum, and good evening, everyone. Thank you once again for joining us today. 2021 indeed has proven to be volatile for the industry as well as for the country. This was evident looking at the COVID-19 variants against the vaccination rate. Business, of course, continues to face challenges. Demand restructured higher cost of business because of the precautions against COVID and whatnot. And for the country, the political uncertainty affecting the capital market and towards the end of last year, the cost of nature amidst early traces of economic recovery. Nevertheless, for PGB, as we have been saying during the various analyst meeting, our business model and long-term contracts steadily ensured steady revenue streams, particularly for the Gas Processing, Gas Transportation and Regasification business segment. So going -- next slide, please. Going into the 2021 highlights. Again, our plants and facilities continue to perform well, and our digitalization initiatives has resulted in higher efficiency. We also commenced production from our Nitrogen Generation Unit, NGU. Alongside the high production is additional revenue stream from ancillary services, together with new and extension of utilities contracts that we have been focusing on the last one year or so. Again, early in 2021, we shared with all of you that our focus on growth were collaboration in the delivery and integrated utility solution, pursuing opportunities in power generation, exploring step-up opportunities emerging from the energy transition. So happy to say that we have since moved forward with 3 growth projects, actually reaching final investment decision throughout 2021. And currently, the progress is well underway. Mainly, if you recall the lateral pipeline, the debottlenecking and expansion of the southern region in view of the ever increasing demand for southern region. And at this moment, we are continuing our evaluation of the potential third story [ stand ] for LNG. And as I mentioned at the time, we will share further details as we progress in this initiative. Now going into the financial performance for the year. I'm pleased to share with you that we actually achieved our best financial performance thus far in 2021. However, for the quarter ended 31 December 2021, PGB recorded MYR 1.5 billion revenue, higher than the same quarter last year and the preceding quarter 3 of 2021. And this was largely to Utilities selling its product at higher price and again, in line with the higher fuel gas price. Utilities also recorded higher electricity sales volume following the commencement of electricity supply under the new electricity dispatch arrangement, NEDA, that we managed to get license in August 2021. And all that has contributed to group profit. However, it declined to MYR 650 million, primarily driven by higher operating costs and again, largely due to higher internal gas consumption costs. Profit after tax, lower by 21% in tandem with lower gross profit, partially offset by the impact of favorable foreign exchange movement. I'd like to highlight for the 12-month performance, revenue stood at MYR 5.65 billion, which is an increase of 1%, mainly contributed by higher revenue from Utilities and Regasification segments. Utilities, as mentioned, recorded higher sales of steam to new customers, while Regasification secured a new revenue stream from LNG reloading at our Regas terminal in Sungai Udang and the truck loading at the Regas terminal in Pengerang. I'm sure if some of you have read the newspaper recently, the loading has exceeded -- just breached the 1,000 loading early this year. The gross profit was higher by 2% at MYR 2.72 billion with the Regasification and Utilities segments recording lower operating costs, leading to improved margin, respectively. So PAT, similarly, improved by 1% to reach MYR 2.11 billion for the full year. So more details on financials will be presented by Sharis after this. Going on the operational side, which is on the Page 10. The operation -- first, at Gas Processing, the operation of our Gas Processing plant continue to operate as usual. The OEE or Overall Equipment Effectiveness remain within range for both C1 ethane and C2 ethane. We achieved -- continue to achieve good reliability, sales gas at 99.96%, which demonstrates our commitment to ensure continuous supply to our customers. The high level of efficiency also resulted in higher performance incentives of MYR 91 million. I think all of you are aware that we -- the more we produce with higher reliability, we stand to gain on the performance bonus incentive that came with the gas processing agreement that we had with [indiscernible]. Moving on to Gas Transportation and Regasification, the pipeline network reliability, again, was sustained at close to 100%. And for the year, we delivered an average of 2 billion standard to be fixed per day of sales gas to customers. For the Regasification business, both the Regas terminal at Sungai Udang and Pengerang sustained each OEE level at 100%. During the year, the RGT in Sungai Udang received 8 cargoes, while RGT Pengerang received 29 cargoes, making it a total of 37 cargos received. Our LNG ancillary services, as I mentioned just now, the truck loading business has seen a tremendous growth. First introduced in quarter 4 of 2020, and I mentioned just now, we recently achieved the 1,000 delivery milestone of our truck loading business on 26 January, 2022, quite a fast growth in the loading services. Moving on to Utilities. Overall, we continue to fulfill customer demand, 100% product delivery reliability recorded across all products. Looking at full year results, first, electricity, again the volume has improved, mainly contributed by sales to new customers. There were 2 new customers coming on board, including the NEDA sales that I mentioned previously. [ PIC ] also recorded higher volume, in line with demand from new customers and less turnaround untaken at existing customers plant. Similarly, industrial gases saw improved offtake following the delivery of the low-pressure gas nitrogen to new customers from our third nitrogen generation unit in Kertih. So ladies and gentlemen, that's all for our operational performance. We'll move next to financial segment with Sharis.

Thank you, Encik Aziz. Assalamualaikum, and a very good evening, everyone. I will now take you through the financials, starting with Page 14. So first, the Gas Processing segment performance. Against the preceding quarter, quarter 3 2021, we saw comparable revenue at MYR 433 million. Gross profit was slightly lower by 4% at MYR 235 million on higher operating costs. Against the corresponding quarter, quarter 4 of last year, segment revenue increased by 2% or MYR 10 million as we registered higher incentives relating to efficiency. Segment results rose by 5% due to marginally lower operating costs, mainly relating to lower depreciation expense. Against the corresponding period, for the full year, our revenue was comparable at MYR 1.72 billion, while segment results was also roughly comparable, albeit slightly lower by 1% at MYR 937 million as we saw slightly higher operating costs mainly relating to Utilities. Moving on to Page 15, which is Gas Transportation, if we were to compare against the preceding quarter, quarter 3, revenue remained comparable at MYR 295 million, just a slight increment due to the higher number of operating days. Gross profit declined by 42%. This is mainly on higher operating costs, largely due to operations and maintenance in line with specific plant activities during the quarter. Against the current quarter, quarter 4 of last year, again, revenue was comparable, while gross profit was lower by 32%, again due to higher operating costs, and this is due to the Internal Gas Consumption cost or IGC costs, which is a pass-through under IBR tariffs. For the year, compared to 2020, revenue was similarly comparable at MYR 1.17 billion, very marginally lower by 0.3% or MYR 3 million due to the lower number of operating days, coupled with slightly lower operations and maintenance revenue. Segment results was 12% lower at MYR 699 million, mainly as we saw higher operating costs relating to IGC costs as well as the maintenance costs in line with the high level of plant activities. With regards to the IGC costs for the year, we saw higher costs in line with the higher average sales gas delivered, as mentioned by Encik Aziz earlier, at over 2 billion metrics standard cubic feet per day compared to in 2020, when it was below 1.9 billion metrics cubic feet per day as well as the higher price for the IGC in line with the reference market price. But again, as mentioned and previously and as iterated, these IGC costs are fully recovered under tariffs. So we are not out of pocket, so to speak. Now moving on to the Regasification segment, which is on Page 16. Against the corresponding -- against the preceding quarter, quarter 3, we saw a slight decrease in revenue to MYR 366 million. Segment results was 23% lower at MYR 269 million on lower operating costs. This was due to the higher Internal Gas Consumption costs. As highlighted in the last briefing, there was a correction on the unaccounted gas component of IGC for both Regasification terminals in quarter 3 of 2021. The amount was roughly about MYR 33 million. So if we were to normalize for this adjustment, which occurred in quarter 3, the results would be comparable. Against the corresponding quarter, quarter 4 of last year, we saw revenue improved slightly by 0.5%. As mentioned by Encik Aziz, we did see the new revenue stream from LNG reloading at RGT, SU as well as truck loading at Pengerang. Segment results rose by 26% as a result of lower operating costs, mainly to do with Utilities costs, as during the quarter, there was a favorable adjustment on the charging mechanism of electricity at Pengerang, mainly relating to contractual take-or-pay requirements. For the year-to-date, segment revenue was more or less comparable, a slight growth of 1% to MYR 1.41 billion, again due to the new revenue stream, while segment results rose by 14% to MYR 811 million as we saw lower operating costs, largely attributable to the lower Utilities expense, as mentioned previously. Last but not least, Utilities on Page 17. Against the preceding quarter, revenue increased by 19% to MYR 412 million. As explained earlier, we did see higher volumes across all products as well as the higher prices for fuel and industrial gases. Segment gross profit, nevertheless, decreased to MYR 55 million. It was lower by 25% on higher operating costs. For results against quarter 4 of 2020, revenue increased by 30%, mainly as we saw higher product prices coupled with the contribution from electricity sales following the commencement of the supply [ decree ] under NEDA from August 2021 onwards. Segment results declined by 26% as we recorded higher fuel gas costs, which resulted in lower margins. For the full year, similar trends. Segment revenue grew by 3% to MYR 1.35 billion, again on high sales volume amidst lower product prices. Conversely, the segment results surged by 34% as the higher revenue was also complemented by a lower depreciation expense as we had fully depreciated assets, which are still in use. Now moving on to the group level results. Preceding quarter, quarter 3 2021, we saw higher group revenue by 5%. This is attributable to higher revenue from Utilities as mentioned, higher product prices as well as higher sales volumes. As far as the gross profit is concerned, it was nonetheless lower by 22%. This was driven by higher operating costs, mainly relating to the Internal Gas Consumption of IGC on the regulated business [ assets seen ] previously. PAT was correspondingly lower by 21%. Against the corresponding quarter, quarter 4 of 2020, we saw an improvement in group revenue by 8%. Again, the revenue from Utilities segment was higher due to the higher prices in line with higher fuel gas, coupled with the higher sales volume in electricity. Gross profit was, nonetheless, lower by 3% as we saw the higher operating costs from Gas Transportation and Utilities segment, mainly relating to fuel gas -- Internal Gas Consumption and fuel gas costs, respectively. Profit after tax declined by 6% in tandem with lower PBT, further reduced by a higher deferred tax expense relating to the [indiscernible] impact in 2022. For the full year, revenue increased by 1% to MYR 5.65 billion as we saw higher revenue from Utilities and Regasification segment, while gross profit improved by 2% with stronger contribution from both the segments as well, Utilities and Regasification. PAT also improved by 1%. Moving on to the balance sheet on Page 19. The balance sheet in terms of total assets remain robust, exceeding MYR 19 billion at 31st December 2021, while we also are providing the breakdown of the segment asset -- net book value by segment, which remained comparable compared to previous quarters. Now moving on to the dividend on Page 20. The Board of Directors has today approved a fourth interim dividend of MYR 0.22 per ordinary share and a special interim dividend of MYR 0.10 per ordinary share amounting to a total of MYR 633.2 million in respect of the financial year ended 31st December, and this will be payable on 22nd March. The dividend approved demonstrates our continued commitment to ensure the sustained level of results to our shareholders despite the ongoing economic conditions. With that, we end the financial section, and I will now pass the line over to Encik Aziz to share on some company updates.

Thank you, Sharis. Moving on to updates. So as I mentioned in early part of the briefing, in 2022, PGB focus is that we will be sustaining the current revenue streaming in line with gas demand, pursuing growth, leveraging our key competencies and exploring step-up opportunities. So what I would like to update is the highlight on the progress of the projects that we have announced in 2021 within the cluster of the focus area that I mentioned. Generally, all are progressing as planned. First, the lateral pipeline that we announced in the first quarter of 2021, it is on target. The progress is as what was planned, to complete in quarter one, 2023. The second project that we announced for the year was the debottlenecking of the southern TEU. It has reached more than 80%, and it is expected to be completed by middle of this year, in line with the commitment to the -- to our shipper for the completion of this project. The third is, again, the southern pipeline sector, the expansion projects that we announced recently in November 2021. The contractor is on board. Nevertheless, because we have just awarded the contract, it is still at an early stage of engineering work. We have also been quite active for the exploring potential of the third LNG storage tank, as I mentioned, where we went out and tried to secure some expression of interest. We currently have had the interest coming in and in the midst of reviewing the proposals that we have received from interested bidders. Of course, we have to go through the process, and we expect, should we reach a conclusion with the interested bidders, final investment decision would be some time in quarter 4 of this year. Lastly, another project that is ongoing is the gas processing plant in Kertih for the optimization of the feedstocks that are available in the area. Also, we actually started the project end of 2021 and currently the engineering work is progressing satisfactorily and due to be completed by quarter 2, 2023. On the commercial side, our Utilities -- this is the 20th year of the operation and some of the Utilities contracts with our long-term customers are due for renewal. So some of it has been renewed, some are being discussed and being finalized. And throughout this year, when the depth of renewal is reached, we will share accordingly on the renewal of these long-term customers for our Utilities products. So that's all the update. Moving on to question-and-answer, please. Thank you.

[Operator Instructions] Our first question comes from the line of Alex Goh from AmBank.

I have a number of questions, but I will go through the first 2 first, then I'll wait for my turn. The first question is regarding your dividend. If I were to look into last year, your -- including your special dividends, you, last year, paid MYR 0.45 higher. I mean, this year, your dividend you're paying out is MYR 0.45 lower. Could you go through what's your thinking behind this? And what would bring -- would you be -- would need to happen for you to bring the special dividends up to the MYR 0.27 that you paid in 2020? Also maybe run through with us what perhaps your investments or CapEx and the kind of sum that you're looking at that is influencing your decision.

Thank you for the question. With regards to the special dividend that we gave for the financial year 2020, the first tranche of the special dividend, which was at MYR 0.50, it was really driven by the capital restructuring exercise that was ongoing in 2020. So the -- it's not really an apple-to-apple comparison. The MYR 0.50 in -- for financial year 2020 was really on the capital restructuring, while the remaining MYR 0.05 was really at the end of the year when we closed off the results. So I mean, the better comparison would be the MYR 0.05 and MYR 0.10 this year. So in terms of moving forward, again, there are considerations being given in terms of the CapEx requirements and whatnot. But having said that, the -- our target has always been to ensure that we meet the dividend policy as far as possible, which is 50% of profit after tax and noncontrolling interests, while also seeing -- meeting the dividend payout ratio based on our historical trend, excluding one-offs like the MYR 0.50 special dividend.

But are you still going to adhere to your balance sheet optimization program, where you mentioned last time you are looking at more optimal gearing level of maybe about 50% similar to the utilities companies? Are you still maintaining that? And should we expect additional capital restructuring payouts in future?

In terms of the exercise itself, that is still ongoing. Again, due to the sensitivities of some of these things, we will make the announcement once we are finalized and they materialize. However, as far as last year was concerned, there wasn't any particular activity happening, although the review and in terms of signing and whatnot, that has continued. So this process of looking at the optimal gearing is still ongoing even this year. So if there is anything, it may affect the considerations as far as the dividend payout is concerned.

This dividend payment for 2021, would it be the last for this year? Or could there potentially be another announcement for dividend for the year -- financial year 2021?

I'm not -- I mean, I wouldn't be able to comment because, obviously, we still go through the AGM and whatnot. But this is -- as far as the year-end is concerned, this is the fourth quarter interim dividend.

But potentially, you may consider another distribution for the financial year 2021. Would that be right to say that?

I wouldn't say it's under consideration. It's not under consideration at the moment.

It's not under consideration at the moment, is it correct?

Not under consideration at the moment, yes.

I see. Okay. Great. Could you also let us know on your CapEx for this year and your investments that you're planning this year and maybe next year as well?

Yes. In terms of CapEx this year, we ended at around MYR 1.2 billion. For next year, we are expecting slightly higher, probably around MYR 1.3 billion, MYR 1.4 billion, in line with the projects which we have announced.

How about 2023?

2023, at the moment, based on sanction, could see for us a little bit -- yes, if not slightly, but yes, we'll be looking lower than 2022.

I see lower. And...

However, we'll be able to give a better guidance towards the end of the year because, obviously, that's when we go through the budget cycle and whatnot, yes.

Okay. And sorry, regarding Tukau [ Makmor ], do you have a bit more clear on percentage it will impact? I mean 2021, your effective tax rate is about 20%. Do you think to Tukau [ Makmor ] will move it to around 25%?

As mentioned, again, without going into specific tax rates, right, I mean, the guidance that we can give is as before. Both the Regasification terminals do enjoy tax incentives. So they are shielded from the Tukau [ Makmor], which is only going to be for 2022 on book. The impact will really be at the company level, the PGB company level, and we should be announcing our -- or we should be sharing our full set of accounts soon. So you will be able to get a sense from that rather than going into specific ETR.

Our next question comes from Anshool Singhi from JPMorgan.

Can you hear me?

Yes.

Yes. I had a couple of questions. Firstly, in your Transportation segment performance, this has been one of the weakest quarters in the past couple of years. So any specific one-off expenses booked in this quarter? Anything we should know about?

On the Gas Transportation specifically, there were 2 factors for quarter -- sorry, yes, that's the question right? Quarter 4, right?

Yes, quarter 4.

Yes, there were 2 factors. First of all, there was quite a high level of planned maintenance activities, just specifically for this segment, yes. And in addition to that, there was also slightly higher Internal Gas Consumption costs for the quarter, which is actually in line with the level of the sales gas, which was delivered.

Can I just ask, what would the clean margin be for this quarter if you exclude the cost related to those maintenance activity?

Actually, the third quarter would be a better reflection, yes.

So moving forward, also third quarter is a better reflection?

Yes, yes. But again, it may vary again, like depending on what is happening during that particular quarter. But if you were to look at just for this year, the third quarter would be more reflective for the Gas Transportation.

So in the fourth quarter, the higher maintenance expenses, was that due to seasonality or was that due to delays related to COVID?

Not so much delays related to COVID. There were some activities that were planned. Also, there were some costs which -- not so much that was a delay in terms of the activities, that was just the timing of the cost was more in quarter 4 in terms of recognition.

Okay. So the cost recognition was in quarter 4.

Yes.

And moving forward, quarter 3 is a better reflection for the Gas Transportation performance.

Yes. But it would again depend on -- sometimes there are certain planned activities, which are specific to a quarter. So you might see something...

So compared to fourth quarter and third quarter, how does the activity in first quarter stand?

Roughly, say, maybe quarter 3 would be a better reflection, yes.

Okay. Okay. My final question is regarding the IBR. Any updates, any time line, progress, the board? Anything about that? About the implementation?

So as updated in the last briefing, the current RP is until the end of this year. So at this moment, we are doing -- what we are doing today is within the time line that we have per the guidance from ST for the submission. There is this -- the decision [ while not ] by ST, we expect before the year-end, in line with the new RP starting in January next year.

Our next question comes from Daniel Wong from Hong Leong.

Can you hear me?

Yes.