- We maintain our BUY recommendation on Petronas Gas (PGas), but place our sum-of-parts- (SOP) based fair value of RM21.60/share (which implies an FY13F PE of 24x) UNDER REVIEW with a current upside of only 6% given that the share price has risen by 20% over the past 6 months.

- We maintain PGas’ FY13F-FY15F net profit as its 1QFY13 earnings of RM360mil came in within our and market expectations, even though the results accounted for 21% and 23% of our and street’s FY13F forecasts, respectively.

- This is because we expect a boost to the group’s earnings when the 530mmscfd Lekas regassification terminal (RGT) commences operations by June this year. The group did not declare any interim dividend, as expected.

- The group’s 1QFY13 revenue was flat QoQ at RM910mil as higher bookings of transportation capacity and increased exports of propane and butane were mostly offset by lower sales of electricity and steam under the utilities segment. But 1QFY13 net profit rose 22% QoQ largely due to loweroperational costs and depreciation following a review of fixed asset’s useful life last year, higher associate contribution and a 3ppt-drop in effective tax rate to 26%.

- YoY, the group’s 1QFY13 net profit rose at a slower 8%, largely due to a 6x increase in unallocated expenses which we believe could be related to the ongoing construction of the Lekas RGT.

- As the result of recent 13th General Election has removed concerns regarding the continuity of the government’s energy policies, PGas continues to affirm that the Lekas RGT will commence operations in 2Q2013. As the prices for natural gas for the power and industrial sectors have been set at discounts of 15% and 10%, respectively, we maintain our assumptions for the full-impact of the RGT in 2HFY13, which accelerates FY13F earnings by 15%.

- Besides the Lekas RGT, PGas is also involved in the RM1bil Lahad Datu regassification terminal to supply gas to the Tenaga power plant by 2015. Additionally, the RM60bil Refinery and Petrochemicals Integrated Development (RAPID) in Pengerang, Johor, includes a power generation capacity of 1,200MW and a RGT project which could be much larger than the over RM2bil Lekas RGT.

- We estimate that an every additional RM1bil in investments could raise PGas’ SOP by 16 sen/share, assuming a project IRR of 9%, equity discount rate of 10% and debt:equity ratio of 80:20.

- The stock is currently trading at an attractive FY14F PE of 19x – below its 2009 peak of 23x. We expect further news flow on fresh LNG projects to sustain the stock’s re-rating momentum.

Source: AmeSecurities