Investment Highlights

• We upgrade our call for Petronas Gas (PGas) to HOLD from SELL as its share price has now dropped 19% YoY to near our unchanged sum-of-parts-based (SOP) fair value of RM15.35/share, which implies an FY19F PE of 16x.

• Nevertheless, we maintain PGas’ FY19F–FY21F earnings as the group’s 1HFY19 core net profit of RM966mil, excluding unrealised forex gain of RM53mil from the discontinuance of hedge accounting for the Sungai Udang regasification terminal’s (RGT) USD debt, was within expectations, accounting for 51% of our FY19F earnings and 52% of consensus.

• As a comparison, the group’s earnings for the first halves accounted for 49%–55% of previous 3 financial years. The group also declared a second interim dividend of 16 sen (flat YoY), which was in line with our expectations.

• PGas’s 2QFY19 revenue rose by a flattish 1% QoQ to RM1.4bil on plant utilisation of near 100%. However, the group’s 2QFY19 net profit rose by a stronger 11% QoQ to RM508mil on higher associate contribution from Kimanis Power together with lower depreciation, interest cost and minority charge.

• On a YoY comparison, the group’s 1HFY19 revenue edged up by 1% to RM2.7bil as higher revenue from the utilities (+11%) and gas processing (+8%) segments offset gas transportation (-14%) under the new incentive-based regulation (IBR) regime since the beginning of the year.

• Overall, this caused 1HFY19 core net profit to slide by 3% mainly due to the lower gas transportation and regasification contributions, partly offset by higher gas processing reservation charge under the second term gas processing agreement together with higher utilities prices commencing on 1 January 2019.

• 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%.

• The stock currently trades at an FY20F PE of 16x, 24% below its 3-year average of 21x. However, these lower-than-usual valuations are justifiable given that PGas’ recurring income and margins will be declining progressively over a prolonged trajectory due to the new gas transportation framework, while being supported by attractive dividend yields of 5%. We will provide further updates pending an analyst briefing later today.

Source: AmInvest Research - 27 Aug 2019