- We maintain our HOLD recommendation on Petronas Gas (PGas) with an unchanged sum-of-parts- (SOP) based fair value of RM24.30/share, which implies a FY14F PE of 29x.

- We have fine-tuned FY14F-FY15F earnings as the group’s FY13 pre-tax and net profit came in within our expectations. While the group’s pre-tax profit also came in within street estimates, net profit was 22% above consensus, which may not have accounted for PGas’ positive tax charge.

- Note that PGas’ FY14F earnings are expected to contract due to the normalisation of corporate tax rate as FY13 enjoyed the Lekas regassification terminal’s (RGT) RM626mil investment allowance together with deferred tax write-backs from the 1%-point reduction in corporate tax rate to 24% this year.

- We introduce FY16F earnings with a normalised growth of 3%, underpinned by the stable recurring revenues of its main gas processing and transportation business. The group declared a final dividend of 40 sen (+5 sen YoY) as expected, raising its total dividend to 55 sen, translating to a payout of 52%.

- The group’s 4QFY13 revenue and pre-tax profit were flat QoQ at RM1,028mil and RM471mil respectively. At the pretax level, higher operating expenses were offset by a RM78mil one-off income arising from Petronas Chemical’s termination of utilities and electricity for its discontinued vinyl business. But a 3%-point reduction in effective tax rate to 17% drove net profit slightly up by 4% to RM394mil.

- Excluding net gains of RM100mil from the IPO of Gas Malaysia in 2012, PGas’ FY13 net profit surged by 59% YoY to RM2,079mil due to the commencement of the Lekas RGT in 2QFY13 together with a RM183mil positive tax charge arising from the RGT’s tax allowances and lower deferred tax provision.

- 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. Based on an overall cost of RM4bil, 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, which could be diluted by other investors.

- The new gas processing and transmission agreement (GPTA), which will replace the 4th agreement, will

commence in April 2014. But the new pricing mechanism will be similar to the current model, which already provided a significant earnings boost back in 2010-2011. Additionally, the final investment decision for the proposed 100mmscfd Lahad Datu RGT is uncertain following the incursion by Sulu rebels earlier last year. The stock currently trades at a pricey FY14F PE of 28x.

Source: AmeSecurities