- We maintain our HOLD recommendation on Petronas Gas (PGas) with a slightly higher SOP-based fair value of RM24.40/share (vs. RM24.30/share earlier), which implies an FY14F PE of 29x.

- We have slightly raised PGas’ FY16F earnings but maintained FY14F-FY15F assumptions as the new Pengerang pipeline will only marginally raise the group’s net profit.

- The group has awarded a RM261mil contract to procure, construct, and commission the Pengerang Gas Pipeline Project over a 26-month period to Barakah Petroleum’s PBJV Group Sdn Bhd.

- This is part of the expansion of the Peninsular Gas Utilisation (PGU) pipeline network to the Pengerang Integrated Complex, in which PGas’ ultimate holding company Petronas had recently approved in its final investment decision (FID).

- We understand that the pipeline will span 60km-70km between Pasir Gudang and Pengerang (see chart 6), while the land area has been largely handed over to Petronas.

- This proposed pipeline is to ensure stability of supply from the PGU and to offtake the excess gas from the proposed liquefied natural gas (LNG) terminal at the deepwater independent terminal. Recall that the Pengerang Deepwater Independent Terminal is currently being constructed by the Dialog-Vopak-Johor state consortium.

- PGas will have fixed reservation and flow rate charges as stipulated in the new Gas Processing & Transportation Agreements. But the equity IRR for this pipeline - expected in the high single digits - is likely to mostly stem from the fixed reservation charge, which will be based on the pipeline capital expenditure.

- Assuming a 9% equity IRR, we have incorporated a NPV of RM85mil from this project to raise PGas’ SOP slightly to RM24.40/share.

- As Petronas has approved its FID for the Refinery and Petrochemical Integrated Development, PGas expects its own FID for the onshore regasification terminal (RGT) in Pengerang by September this year. We understand that PGas will likely hold the controlling equity stake in this RGT while its other partners, most likely Dialog and Vopak, will have the remaining stake.

- Assuming an overall cost of RM4bil (compared to RM3bil for the Lekas RGT in Melaka), equity IRR of 9%, and 60% equity stake, the Pengerang RGT accounts for 1.6% of our revised SOP.

- The stock currently trades at a pricey FY15F PE of 27x. But dividend yield is still decent at almost 3%.

Source: AmeSecurities