Investment Highlights

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

• PGas held a teleconference post-1QFY18 results today helmed by MD/CEO Kamal Bahrin Ahmad and CFO Shariza Sharis Mohd Yusof. The key points of the briefing are:
  • Management did not provide guidance on whether the strong increase in the regasification EBIT, which surged 2.2x, could be sustained in 3QFY18 and onwards with the completion of the second Pengerang LNG regasification terminal’s (RGT) storage tank on 9 April this year. This stems for an expected increase in depreciation, interest charges and capitalised costs.
  • As such, we maintain our assumptions for the group’s 65%- owned Pengerang RGT, as the guidance for 8%-10% of group earnings remains intact. Based on the 1QFY18 regasification EBIT increase of RM96mil vs. 1QFY17, we estimate that the Pengerang RGT already accounted for 17% of FY17 EBIT, which effectively dropped to 11% post-minority interest charge.
    • Recall that 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 starting from 1 November 2017 even though the full project completion has yet to be achieved.
  • As the newly elected government has maintained petrol prices for the past weeks despite the increase in global crude oil prices, management was unable to confirm if the Energy Commission’s (EC) framework for the third-party access mechanism has changed.
  • Under the Gas Supply Act (GSA) 2016, the new transportation tariff is expected to be effective by January 2019, which we opine will proceed as envisaged given that consumers will benefit from a potentially lower Incentive-Based Regulationdriven (IBR) price based on reduced rate of return of regulated asset base, from an earlier 9% to Tenaga’s 7.3%, as guided by the EC.
  • The EC is still discussing transportation tariff guidelines with PGas, which was earlier expected to be released by March this year. This would have provided details on the computation of the asset base and required rates of return under the third-party access arrangement.
  • PGas is still scheduled to submit the proposed tariff based on those guidelines in 2Q2018, engage in negotiations throughout 3Q2018 and await the finalisation of the structure by 4Q2018. Pending the regulator’s announcement, management is working to mitigate the potentially value-eroding impact.
• 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 could erode over the longer term due to the EC’s plan to implement IBR policies on the group’s gas transportation tariffs.

Source: AmInvest Research - 18 May 2018