Investment Highlights

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

• The key takeaways from PGas’ analyst briefing yesterday are:

• While the group has submitted the Regulatory Period (RP) 1 proposal for the incentive-based regulation (IBR) framework to the Energy Commission in April this year, management has not revealed the potential change in the gas transportation and regasification tariffs for the 3-year period commencing on 1 January 2020 given the ongoing discussions and reviews. Recall that our gas transportation tariff assumptions are 5.6% decrease in the FY20F and 18% in FY23F in RP2. Overall, these translate to an annual earnings reduction of 2% in FY20F with FY23F earnings dropping by a larger quantum of 7.5%.

• The fire at the gas processing plant in July this year at the Paka, Terengganu caused a temporary 6-day shutdown, which will not have a substantive impact on the group’s operating costs or utilisation levels.

• PGas’ 2QFY19 depreciation declined 1% QoQ and 2% YoY to RM274mil as some of the gas processing segment’s functional assets have been fully depreciated. This was partly mitigated by higher capex from the Pengerang RGT.

• Management expects the group’s annual capex to increase to RM1.1bil–RM1.2bil in FY19F–FY20F from RM916mil in FY18 due to rejuvenation programmes for the second gas processing plant in Terengganu. While slightly higher than our assumption of RM1bil, we maintain our forecasts for now pending further adjustments towards the year-end.

• The Pengerang regasification terminal (RGTP) has commenced gassing up & cooling down services to displace gas from storage tanks in LNG vessels since April this year. While not incurring significant cost to undertake this service, this is a separate revenue and earnings stream from the regulated regasification operations under the IBR framework. Nevertheless, this new operation, which generated revenues of US$200K (RM0.8mil) to date, will add to less than 1% to the group’s prospective earnings.

• Management reaffirmed its intention to maintain FY18 DPS of 72 sen, which translates to a payout of 75% based on FY19F core earnings vs. 71%–73% in FY16–FY17.

• The stock currently trades at an FY20F PE of 16x, 24% below its 3-year average of 21x. However, these valuations are justified 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%.

Source: AmInvest Research - 28 Aug 2019