Investment Highlights

• We maintain our HOLD recommendation 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.

• Barakah Petroleum (Barakah) has served a RM180mil notice of demand on PGas for losses incurred under the extension of time for work carried out on the Pengerang Gas pipeline project. This includes loss of balance of the project, change orders and revenue loss from the 3-year suspension of Barakah’s Petronas licence on 8 July this year due to adverse performance reports for Petronas Carigali S/B’s (PCB) underwater contract.

• Barakah was subsequently placed under the PN 17 status due to financial distress. On 5 August 2019, Barakah disputed the validity of the licence suspension with the claim that the contract was successfully completed and given positive appraisal by PCB.

• Hence, Barakah is claiming RM1bil from Petronas and PCB for loss on its future profit, reputation and share price collapse.

• However, on 13 August 2019, Barakah received demand notices of RM85mil from Petronas’ PRPC Utilities and Faclilities S/B for failure to fulfil its P14 contract for utilities, interconnecting, offsite facilities procurement, construction & commissioning of East Side underground pressurized nonmetallic piping firewater network.

• The legal claim, if successful, can cut PGas’s FY20F net profit by 10%. However, we view that Barakah’s claim is tenuous given that Barakah was already experiencing financial distress even before the suspension of its Petronas licence.

• While this claim is unlikely to have any substantive financial impact to PGas, we expect its recurring income and margins to decline progressively over a prolonged trajectory due to the new gas transportation framework which was implemented beginning this year.

• Recall that our gas transportation tariff assumptions have assumed a 5.6% decrease in the FY20F and 18% in FY23F in RP2. Overall, this translates to an annual earnings reduction of 2% in the first regulatory period (RP) in FY20F while FY23F earnings drop by a larger quantum of 7.5% under the second RP.

• Hence, the stock currently trades at a fair FY20F PE of 17x, 19% below its 3-year average of 21x while being supported by attractive dividend yields of 5%.

Source: AmInvest Research - 3 Oct 2019