- As Petronas Gas’ (PGas) share price has reached close to our unchanged sum-of-parts-(SOP) based fair value of RM24.30/share (which implies an FY14F PE of 28x), we downgrade our recommendation on Petronas Gas (PGas) from BUY to HOLD.

- We maintain FY14F-FY15F pre-tax profit growth of 11%-24%, which is underpinned by the full year contribution of the 530mmscfd Lekas regassification terminal (RGT), which started in July this year, and its 60%-owned 300MW Kimanis gas-fired power plant for next year. But as PGas’ FY13F net profit benefits from a RM591mil tax allowance for its Lekas RGT investment, the group’s FY14F net profit is expected to decline by 13%.

- We expect 4QFY13 to be weaker QoQ given the usual yearend maintenance activities and lower utilisation of the centralised utility facilities amidst a seasonally weaker demand for petrochemicals.

- The commencement of the Kimanis plant, which is expected to be operational on 1 Dec this year, will be

delayed by at least 6 months as Sabah Electricity’s transmission grid is not expected to be ready until May 2014. With an additional 3 months commissioning period, the plant is only expected to start operation in 2HFY14.

- While awaiting Petronas’ final investment decision by 1Q2014, we understand that the capacity of the Pengerang onshore RGT may not be significantly larger than the Lekas terminal, which was built on a jetty. But the overall cost of RM4bil Pengerang RGT is higher than the Malacca unit, which cost RM3.5bil including MISC’s 2 floating storage units.

- Based on a project IRR of 9%, equity discount rate of 10% and debt:equity ratio of 80:20, this project could potentially raise the group’s SOP by 64 sen. But as other investors could dilute PGas’ stake in the Pengerang RGT - the unit may be located on Dialog-Vopak-Johor state’s Independent Deepwater Terminal - we have only incorporated a 60% equity stake in our SOP valuation.

- The gas processing and transmission agreement, under its 4th term, will expire in March 2014. But we understand that the new pricing mechanism may be similar to the current model, which provided a significant earnings boost back in 2010-2011. Hence, we do not expect a re-rating catalyst from the new agreement early next year.

- Additionally, the final investment decision for the proposed 100mmscfd Lahad Datu RGT, which is 1/5 the size of the Malacca unit, is uncertain following the incursion by Sulu rebels earlier this year. Recall that the RGT was proposed to supply most of its gas to a 300MW power plant, which was to be built by Tenaga Nasional. The stock currently trades at a pricey FY14F PE of 27x vs. its 2007 peak of 22x.

Source: AmeSecurities