CGS-CIMB Research said PetGas’ regulated capital expenditure (capex) is guided to be “above RM2 billion” based on the incentive-based regulation (IBR) Regulatory Period 2 (RP2) 2023 to 2025 tariffs.

The research house said the bulk of the capex will be allocated to peninsular gas utilisation (PGU), which is significantly higher than RP1, based on a briefing by PetGas recently.

However, it said PetGas did not disclose its RP2 regulated return but has guided that it is similar to other utility players under regulation.

“We gather that overall revenue reduction from PGU under RP2 will likely come to only 2% instead of 5.8% versus RP1,” the research house said, maintaining its “hold” call for PetGas with a target price of RM16.90.

The IBR was introduced in 2014 for the electricity sub-sector as part of the modernisation of the electricity supply industry. This allows a structured and transparent way of tariff setting, taking into account the huge requirement for capital expenditure (Capex) and operational expenditure (Opex) by the utilities.

IBR ensures the utility companies can enhance their efficiencies and increase transparency in providing electricity supply to customers.

Meanwhile, Kenanga Research said PetGas’ earnings are expected to remain stable with more than 90% being safeguarded by the IBR framework.

It said the company’s future earnings will remain neutral given a high asset base is set to mitigate a lower weighted average cost of capital (WACC).

“We hold the view that terms stipulated under the RP2 will have a neutral impact on PetGas as a lower WACC is cushioned by a growing regulated asset base, while the yearly adjustments on forex fluctuation and gas prices will reduce earnings volatility,” it said.

Kenanga Research has maintained a “market perform” call on PetGas and tweaked its target price from RM17.00 to RM17.13.

At 2.41pm today, PetGas rose 24 sen to RM17.24, giving it a market capitalisation of RM34.1 billion.