Investment Highlights

• We retain our HOLD call 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.

• Pending an analyst briefing later this morning, PGas’ FY19F– FY21F earnings are maintained as the group’s 9MFY19 core net profit of RM1,412mil (excluding unrealised forex gain of RM38mil from the Sungai Udang regasification terminal’s [RGT] USD debt) was within expectations, accounting for 75% of our FY19F earnings and 76% of consensus.

• As a comparison, the first 9 months of FY16–FY18 accounted for 69%–83% of their respectively years. The group also declared a third interim dividend of 18 sen (flat YoY), which translates to an in-line 9MFY19 DPS of 50 sen.

• PGas’s 3QFY19 revenue fell 3% QoQ to RM1.3bil mainly due to lower utilities’ plant utilisation, which was attributed to statutory turnaround of one of the air separation units in Kertih. Coupled with higher repair and maintenance costs for all divisions, the group’s 3QFY19 core net profit slid by 12% QoQ to RM446mil.

• On a YoY comparison, the group’s 9MFY19 revenue slipped slightly by 1% to RM4.1bil due to the adjustment to the gas transportation and LNG regassification rates under the new incentive-based regulation (IBR) regime since the beginning of the year. This was partly offset by higher revenue from gas processing and utilities under the new gas processing agreement and fuel gas price increases in January this year.

• Overall, this caused 9MFY19 core net profit to slide by 3% mainly due to the lower gas transportation and regasification revenue, partly offset by higher gas processing reservation charge under the 2nd Term Gas Processing Agreement together with higher utilities prices commencing 1 January this year.

• Recall that our forecasts have already incorporated declines in gas transportation revenues by 14.1% for FY19F, 5.6% in FY20F and 18% in FY23F due to the Energy Commission’s (EC) gas transportation guidelines for the pilot programme and the two 3- year regulatory periods in 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 18x, 10% below its 3-year average of 20x. 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%.

Source: AmInvest Research - 20 Nov 2019