- We upgrade our recommendation on on Petronas Gas (PGas) to BUY from HOLD but with an unchanged sum-ofparts-(SOP) based fair value of RM24.40/share, which implies an FY15F PE of 27x, following the stock’s recent share price decline.

- We have fine-tuned FY14F-FY16F earnings as the group’s 1HFY14 net profit of RM853mil came in largely within expectations, accounting for 50%-51% of both our and street estimates. The group declared a higher interim DPS of 20 sen (+15 sen YoY), as expected.

- The group’s 2QFY14 net profit rose by a flat 4% to RM435mil in tandem with a 5% QoQ revenue increase, as higher earnings contributions from gas transportation, utilities and regassification terminal was partly offset by higher operating expenses and a 2ppts increase in effective tax rate to 25%.

- YoY, the group’s 1HFY14 pretax profit surged by 18% largely driven by the full contribution of the Lekas regassification terminal (RGT), which commenced towards the end of 2013.

- But 1HFY14 net profit fell by 35% to RM853mil due to the positive tax charge in 1HFY13, which stemmed from investment allowances from the RGT. The RGT accounted for 14% of PGas’ 1HFY14 EBIT of RM1,129mil.

- As highlighted in our earlier reports, FY14F net profit is expected to contract due to the normalisation of corporate tax rate as FY13 benefited from the Lekas regasification terminal’s (RGT) RM626mil investment allowance together with additional deferred tax write-backs from the 1ppt reduction in corporate tax rate to 24% this year.

- The results have affirmed our view that the group’s earnings prospects will 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 recent share price decline, in tandem with the overall market affected by external events, does not reflect the group’s earnings fundamentals. The stock currently trades at an attractive FY15F PE of 23x (compared to its 3-year range of 24x-28x) with dividend yield at a decent 3%.

Source: AmeSecurities