- We maintain our BUY recommendation on Petronas Gas (PGas) with an unchanged sum-of-parts- (SOP) based fair value of RM24.40/share, which implies an FY14F PE of 29x.

- We maintain FY14F-FY16F earnings as the group’s 1QFY14 net profit of RM418mil came in within expectations, accounting for 25% of both our and street estimates. The group did not declare any interim dividend as expected.

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

- The group’s 1QFY14 revenue rose by a flat 3% QoQ as the positive impact of higher electricity tariff starting on 1 January 2014 for the utilities division was largely offset by lower propane and butane exports, coupled with slightly lower transportation charges.

- But the group’s 1QFY14 net profit rose by 6% QoQ largely due to higher electricity tariffs for the utilities division and lower operating expenses for both the gas processing and transportation divisions. Hence, the EBIT margins for the utilities division surged by 14ppt to 19%, gas processing by 10ppt to 50% and gas transportation by 12ppt to 80%.

- YoY, the group’s 1QFY14 net profit rose by 16% largely due to the commencement of the RGT in Malacca in 2H2013. The RGT accounted for 14% of PGas’ 1QFY14 EBIT of RM546mil.

- We expect the group’s earnings growth to be largely unchanged from the new gas processing and transmission agreement (GPTA) which will commence on 1 April 2014. Essentially, a higher proportion of the group’s earnings have shifted to fixed reservation component, providing higher earnings stability.

- As Petronas has approved the Refinery and Petrochemical Integrated Development in Pengerang recently in its final investment decision (FID), PGas expects to reach its own FID for the Pengerang RGT by September this year.

- We understand that PGas will likely hold the controlling equity stake in this RGT while its other partners, potentially 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 SOP.

- The stock currently trades at a pricey FY15F PE of 26x but dividend yield is still decent at almost 3%

Source: AmeSecurities