Investment Highlights

• We maintain our SELL recommendation for Petronas Gas (PGas) with an unchanged sum-of-parts-based (SOP) fair value of RM16.60/share, which implies an FY18F PE of 18x, a 20% discount to the 2-year average of 23x.

• This is due to the expected value erosion from the Energy Commission’s plan to implement Incentive-Based Regulation (IBR) tariffs on the group’s gas transportation tariff under the Gas Supply Act 2016, expected to be effective by January 2019.

• We maintain PGas’ FY18F-FY19F earnings as its FY17 net profit of RM1,793mil was within expectations. However, the group declared a final dividend of 19 sen (+3 sen QoQ), which raises FY17 DPS by 3 sen to 66 sen, translating to a payout ratio of 73%, above our forecast.

• The group’s 4QFY17 net profit rose 17% QoQ to RM487mil, supported by revenue growth of 12%, driven by the maiden contribution of its 65%-owned Pengerang regassification terminal (RGT) on 1 November 2017 and a 6ppt decline in effective tax rate. This commencement of the Pengerang RGT doubled QoQ the regassification EBIT to RM153mil.

• On a YoY comparison, the group’s FY17 revenue climbed 5% to RM4.8bil from higher utilities tariffs on 1 July 2016 and 1 January 2017 coupled with the 490 mmscfd capacity Pengerang RGT commencement and a higher throughput volume for the Melaka RGT. The contributions of the group’s gas processing and transportation division was largely flat YoY, as expected.

• The group’s next phase of growth will stem from the full-year contribution of the Pengerang RGT, which we have already incorporated RM300mil annually to the group’s EBIT from FY18F onwards.

• Based on management's guidance that its gas transportation segment’s depreciated replacement cost is 3x its current historical book value, our FY18F-FY19F return on regulated asset base (RAB) translates to 9% for the gas transportation segment vs. Tenaga Nasional’s 5.4% ROA in FY17.

• Nevertheless, PGas is still in continuous discussion with the Energy Commission on the framework and quantum of the tariff beyond 2018. We will be providing more details following the analyst briefing later tomorrow.

• The stock currently trades at an FY18F PE of 19x, 17% below its 2-year average while dividend yield is fair at 4%. However, these valuations are unjustified given that its recurring income and margins are likely to erode over the longer term due to the IBR implementation.

Source: AmInvest Research - 26 Feb 2018