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

- PGas has entered into new gas processing, transportation and agent services agreements (GPTA) with its ultimate holding company Petronas for a period of 20 years from 1 April 2014 to 31 December 2033, which replaces the existing gas processing and transportation agreement expiring on 31 March 2014.

- This involves a gas processing agreement for Peninsular Malaysia, 3 gas transportation agreements for Peninsular, Sarawak and Sabah as well as an agent services agreement for billing services for Petronas’ customers. The remuneration terms will be set in intervals of April 2014-Dec 2018, Jan 2019 - Dec 2023, Jan 2024 - Dec 2029 and Jan 2029-2033.

- Based on our preliminary estimates, the new GPTA appears to have a minimal impact on PGas’ earnings, as we had indicated in our earlier reports. Hence, we maintain FY14FFY16F earnings for now pending an analysts’ briefing this Friday 4 April 2014 to clarify the details of the arrangement.

- Essentially, the 2014-2018 remuneration terms appear to shift the gas processing revenues to a higher fixed annual fee, by 16% from RM1.2bil to RM1.4bil. But this is partly offset by the lower revised gas processing flow-rate charge of RM0.20/GJ above a threshold (not announced at this stage) vs. the existing RM0.22/GJ for volume above 2.1 bscfd.

- The new transportation fee of RM1.248/GJ in Peninsular Malaysia is similar to the existing charge of RM1.25/GJ for the Central Zone 3 region (covering Selangor, Negeri Sembilan and Malacca as well as the larger parts of Perak and Pahang).

- The new flow-rate charge of RM1.857/GJ for Miri and RM1.147/GJ for Sarawak is 3%-4% higher than the existing terms. The new transportation tariff of RM0.2863/GJ for a relatively small 1-2km pipeline in Kimanis Sabah will have an insignificant impact on the group’s earnings.

- While still awaiting Petronas’ final investment decision for the Refinery and Petrochemical Integrated Development complex in Pengerang, we understand that the capacity of the onshore regassification terminal 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.

- 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. But dividend yield appears decent at almost 3%.

Source: AmeSecurities