Investment Highlights

• We upgrade our call on Petronas Gas (PGas) to BUY from HOLD with a higher sum-of-parts-based (SOP) fair value of RM17.80/share (from an earlier RM15.35/share), which implies an FY20F PE of 17x.

• We raise PGas’ FY20F–FY2F earnings by 15%–17% on gas transportation revenue assumptions as the segment’s 1Q20 operating profit slid by 6% YoY vs. our earlier estimate of a 12% decline. Also, our forecast assumptions now incorporate internal gas consumption at 6% of transportation revenues.

• Hence, our FY20F gas transportation revenue is now flattish vs. an earlier 5.6% estimated decline from the Energy Commission’s (EC) gas transportation guidelines for two 3- year regulatory periods of FY20F–FY25F. The optimised replacement cost valuation being employed currently will be phased out and replaced with historical cost over these transitional periods.

• Overall, we now expect higher FY20F group earnings vs. a 3% decline while FY23F earnings drop by a lower quantum of 4% vs. an earlier 7%.

• The group’s 1QFY20 core net profit of RM520mil (excluding unrealised forex gain of RM152mil from the Sungai Udang regasification terminal’s (RGT) US$ debt came in above expectations, accounting for 28%–29% of our and street’s FY20F net profit.

• As a comparison, 1Q accounted for 24%–26% of FY17–FY19 core earnings. However, the group’s 1QFY20 dividend of 16 sen was expected, which translates to a payout ratio of 86%.

• PGas’ 1QFY20 revenue rose 2% QoQ to RM1.4bil mainly from the new gas transportation and regasification tariffs (which include internal gas consumption) under the first regulatory period for 2020–2022 under the incentive-based regulation tariffs. Together with a 9% decrease in depreciation, 3x increase in associate contribution from the 60%-owned Kimanis power plant and lower repair and maintenance costs, the group’s core net profit increased 10% QoQ.

• On a YoY comparison, the group’s 1QFY20 revenue rose by 2% to RM5.5bil due to the adjustment to gas transportation and LNG regasification rates under the new IBR since the beginning of the year. This was further supported by lease income from the Pengerang LNG regasification terminal’s jetty.

• The stock currently trades at an attractive FY20F PE of 14x, 30% below its 3-year average of 20x and further supported by attractive dividend yields of 5%.

Source: AmInvest Research - 21 May 2020