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. 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. Overall, this translates to a minimal PGas’ annual earnings reduction of 3% in FY20F while FY23F earnings will drop by a larger quantum of 8%.

• These are the salient highlights of an analyst briefing this morning:

The group’s 60%-owned Kimanis Power (KP) rebounded to an exceptional FY19 pretax profit of RM137mil from an FY18 loss of RM49mil due to a one-off reversal of deferred tax provision.

Excluding the deferred tax item, PGas indicated that KP’s contribution would have been 64% lower at RM50mil, which was also impacted by statutory turnaround for one of its turbines. On a normalised basis, management guided that KP’s associate contribution would have instead been only 42% lower at RM80mil annually.

As we have guided earlier, the announced tariff of RM1.129/GJ for the Peninsular Gas Utilisation (PGU) pipeline under the regulatory period (RP) 1 (2020-2023) includes internal gas consumption, which was excluded for the FY19 published rate of RM1.072/GJ.

This caused the FY20 PGU tariff to appear 4.6% higher YoY, even though management has guided that the new rate will instead lead to a substantial reduction in gas transportation gross profit by 8%–10% — in line with our current assumptions.

Management affirmed that the group and Energy Commission have not disclosed the weighted average cost of capital nor regulated asset base for the PGU assets which are used to compute the new RP1 tariffs.

While the regasification terminal (RGT) in Sg Udang, Melaka has slightly increased by 3.6% to RM3.455/GJ, the facility at Pengerang has risen more significantly by 39% to RM3.485/GJ due to additional jetty revenue. However, we estimate that this is not sufficient to offset the revenue contraction in the gas transportation segment, which has a much higher asset base.

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.

Management reiterated its dividend policy of 50% of profit after tax, which is much lower than the 84% in FY19. This includes a special dividend of 10 sen that may not recur depending on the operating cash flow requirements. As such, we maintain our FY20F–22F DPS of 72 sen, based on a more sustainable payout ratio of 76%–78%.

• The stock currently trades at a fair FY20F PE of 18x, 10% below its 3-year average of 20x and supported by decent dividend yields of 4%.

Source: AmInvest Research - 19 Feb 2020