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 maintain PGas’ FY19F–FY21F earnings as the group’s 1QFY19 core net profit of RM458mil, excluding unrealised forex gain of RM58mil from the discontinuance of hedge accounting for the Sungai Udang regasification terminal’s (RGT) USD debt, was within expectations, coming in at 24% of our FY19F earnings and 25% of consensus.

• As a comparison, 1Q earnings accounted for 25%–26% of the past 3 years’. The group declared a first interim dividend of 16 sen (flat YoY), in line with our expectations.

• Recall that our forecasts have already incorporated declines in gas transportation revenues by 14.1% for FY9F, 5.6% in FY20F and 18% in FY23F due to the Energy Commission’s (EC) gas transportation guidelines for the pilot programme and the 2 3- year regulatory periods from FY20F–FY25F, wherein the optimised replacement cost valuation being employed currently will be phased out and replaced with historical cost over these transitional periods.

• Overall, this translates to a minimal PGas’ annual earnings reduction of 1% in FY20F while FY23F earnings will drop by a larger quantum of 7%.

• PGas’s 1QFY19 revenue declined by only 1% QoQ as the 14% drop in gas transportation and 5% decrease in RGT tariffs under the new EC structure was largely offset by the higher gas processing reservation charge under the second term of the gas processing agreement together with higher utilities prices commencing on 1 January 2019.

• However, the group’s core net profit rebounded 47% QoQ due to normalisation of earnings following the RM106mil associate loss in 4QFY18 from Kimanis Power which stemmed from a deferred tax de-recognition under the 7-year limitation of the new Finance Act 2018. This was partly offset by lower contributions from gas transportation and RGT operations due to the new tariff structure commencing on 1 January this year.

• On a YoY comparison, the group’s FY18 revenue was up slightly by 1% as the 13% decline in gas transportation tariff was more than offset by the higher gas processing and utilities operations. However, declines in gas transportation tariffs and higher depreciation from Pengerang RGT caused core net profit to decrease by 4% YoY.

• The stock currently trades at an FY19F PE of 17x, 19% below its 3-year average of 21x. However, these valuations are still 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 - 28 May 2019