Investment Highlights

• We maintain our SELL recommendation for Petronas Gas (PGas) with an unchanged sum-of-parts-based (SOP) fair value of RM15.35/share, which implies an FY19F PE of 16x.

• We have fine-tuned PGas’ FY19F-FY20F earnings even though FY18 core net profit of RM1,810mil was below expectations, coming in 6%-7% below our and consensus’ estimates. The earnings disappointment stemmed from 60%-owned Kimanis Power’s RM124mil one-off de-recognition of deferred tax assets together with higher maintenance costs and depreciation charges from the gas transportation and utilities segments.

• However, the group declared a final dividend of 22 sen (+4 sen QoQ), which leads to a FY18 DPS of 72 sen — +6 sen above our forecast. This represents a payout ratio of 79% vs. 71%- 73% in FY16-FY17.

• PGas’s 4QFY18 core net profit fell 38% QoQ to RM311mil, due to: 1) RM106mil associate loss from Kimanis Power due to the deferred tax de-recognition following the 7-year limitation under the new Finance Act 2018; 2) halving of utilities contribution due to higher maintenance and one-off asset impairments; 3) higher maintenance costs for gas transportation and regasification operations; and 4) 6-ppt increase in effective tax rate to 24%.

• On a YoY comparison, the group’s FY18 revenue rose by 12% from the 490 mmscfd capacity Pengerang RGT commencement together with higher utilities tariffs commencing on 1 July 2017 and 1 January 2018. However, this was mostly offset by Kimanis Power’s losses and the newly completed Pengerang regasification facilities’ depreciation and capitalised interest costs. Hence, PGas’ FY18 core net profit rose by only 2%.

• Recall that our valuations have already incorporated the backloaded value erosion from the new gas transportation tariff structure under the Energy Commission’s new guidelines for the two 3-year regulatory periods starting from 1 January 2020 to 31 December 2025, wherein the optimised replacement cost valuation being employed currently will be phased out and replaced with historical cost over these transitional periods.

• Assuming a WACC of 8%, PGas will suffer a fall in the transportation segment’s annual revenue requirement by 5.6% in FY20F under RP1 and 17.9% in FY23F in RP2. Overall, this translates to a minimal PGas’ annual earnings reduction of 2% in FY20F while FY23F earnings will drop by a larger quantum of 7.5%.

• The stock currently trades at an FY19F PE of 19x, 14% below its 3-year average of 22x. However, these valuations are unjustified given that PGas’ recurring income and margins will be declining progressively over a prolonged trajectory due to the new gas transportation framework. We will provide further updates pending an analyst briefing later today.

Source: AmInvest Research - 19 Feb 2019