Investment Highlights

• We retain 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.

• Following an analyst briefing this morning, these are the salient highlights which could mean a QoQ rebound in 4QFY19 earnings, in line with our forecasts:

• Management reaffirmed that there was no major impact from the minor fire in July this year at its gas processing facilities as gas supply remains uninterrupted to its customers.

• The 30-day scheduled turnaround maintenance activities, which are conducted over periods of 3 years, at the second air separation unit at the Kertih facilities was completed in 3QFY19 and was coordinated with its customers. This means that utilities revenue, which fell 12% QoQ to RM309mil in 3QFY19, is likely to rebound in 4QFY19 as deliveries remain on track.

• Plant maintenance expenditures, which rose RM20mil QoQ in 3QFY19, are expected to moderate in 4QFY19 in tandem with a slower pace of activities towards the year-end.

• Management guided that the 2% QoQ regasification revenue increase to RM314mil in 3QFY19 largely stemmed from new ancillary businesses, arising from the gassing up cooling down activities together with the reloading at the Pengerang regasification terminal (RGT). While minor in earnings contribution currently, these operations will be complemented with LNG bunkering at the Melaka RGT and LNG truck loading at the Pengerang RGT next year. For the Kertih gas processing facilities, the group plans to build a RM150mil nitrogen gas unit by FY21F. Given the group’s huge asset base, these new ancillary businesses will remain marginal in earnings contribution.

• PGas’ associate/JV pretax fell 23% QoQ to RM36mil largely due to a scheduled plant shutdown at the group’s 60%- owned Kimanis gas-fired power plant and lower lumpy gas services at the Pengerang RGT.

• Note 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. 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