Investment Highlights

• We maintain our SELL recommendation for Petronas Gas (PGas) but with a slightly higher sum-of-parts-based (SOP) fair value of RM16.80/share (from an earlier RM16.60/share), which implies an FY18F PE of 18x, a 20% discount to the 2-year average of 23x.

• The higher SOP stems from a slight increase in our FY18FFY20F earnings due to the higher-than-expected project cost of the Pengerang regassification terminal (RGT), which is scheduled for completion in April this year.

• PGas held a teleconference post-FY17 results yesterday helmed by MD/CEO Kamal Bahrin Ahmad and CFO Shariza Sharis Mohd Yusof. The key points of the briefing are:

• The final project cost for the group’s 65%-owned Pengerang LNG regasification terminal (RGT) is now anticipated to reach US$858mil (RM3.4bil), 26% above the RM2.7bil incorporated earlier in our forecasts. As the RGT tariff will be revised upon finalisation of the capex, we have raised the project value assumption accordingly while lowering the project IRR from 9% to a more conservative 8%, which raises this RGT contribution to our FY18F-FY20F pre-tax profit from 6% to 8%, in line with management’s new guidance.

• Recall that the Pengerang RGT, which has a capacity of 490 mmscfd that is 8% lower than the Melaka RGT’s 530 mmscfd, has reached commercial operation on 1 November 2017. The first storage tank has started with project progress at 98% currently while the second is scheduled to commence in April this year.

• As the capacity of the project is fully contracted to its main shareholder Petronas, PGas has already started accounting for the full revenue recognition from the 2 tanks even though project completion has yet to be achieved.

• The Energy Commission (EC) will be issuing transportation tariff guidelines next month, which will provide details on the computation of the asset base and required rates of return under the third-party access arrangement. Pending the regulator’s announcement, management could only reveal that the group is working to mitigate the potentially value-eroding impact.

• PGas will submit its proposed tariff based on those guidelines in 2Q2018, engage in negotiations throughout 3Q2018 and await the finalisation of the structure by 4Q2018.

• 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 EC’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.

Source: AmInvest Research - 28 Feb 2018