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 tomorrow, PGas’ FY20F–FY21F earnings are maintained as the group’s FY19 core net profit of RM1,886mil (excluding unrealised forex gain of RM49mil from the Sungai Udang regasification terminal’s (RGT) USD debt) came in within our and market expectations.

• However, the group’s 4QFY19 dividends were above expectations due to a surprising special dividend of 10 sen together with a fourth interim dividend of 22 sen (flat YoY), which translate to an FY19 payout ratio of 84% vs 79% in FY18.

• PGas’s 4QFY19 revenue rose 3% QoQ to RM1.3bil mainly from a rebound in the utilities’ plant utilisation following the 3QFY19 completion of a statutory turnaround of one of the air separation units in Kertih. Together with a 3-percentage point reduction in effective tax rate to 16%, partly offset by higher repair and maintenance costs, the group’s 4QFY19 core net profit increased by 6% QoQ to RM474mil.

• On a YoY comparison, the group’s FY19 revenue slid slightly by 1% to RM5.5bil due to the adjustment to 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 2019.

• Overall, the FY19 core net profit was up 4% YoY as the lower gas transportation and regasification revenue was more than offset by higher gas processing reservation charge under the 2nd Term Gas Processing Agreement together with higher contributions from the 60%-owned Kimanis power plant project.

• Recall that our forecasts have already incorporated declines in gas transportation revenues by 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 of 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%. Hence, as we do not expect the special dividend declared for FY19 to recur, we maintain our FY20F– FY23F payout assumptions.

• 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 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 decent dividend yields of 4%.

Source: AmInvest Research - 18 Feb 2020