- We maintain our HOLD recommendation on Petronas Gas (PGas) with an unchanged fair value of RM24.40/share, based on our sum-of-parts valuation. This implies an FY15F PE of 27x.

- We maintain our forecasts as 9MFY14 net profit came in within expectations, accounting for 74% of both our and consensus estimates. The group declared an interim dividend of 20 sen/share (3QFY13: nil). We maintain our DPS assumption of 60 sen for now, which is equivalent to a 70% payout.

- PGas’ 3QFY14F net profit dropped 4% QoQ to RM419mil due to higher operating expenses largely arising from higher fuel gas tariff in January and July 2014.

- The group’s 9MFY14 pretax profit grew by 17% YoY, in tandem with revenue growth of 15% YoY, mainly due to:-

(i) full contribution from the LNG Regasification Terminal (RGT) in Melaka, which only commenced operation late 2QFY13;

(ii) 14% revenue growth in its utilities division due to higher electricity tariff that started on 1 January 2014; and

(iii) 8% revenue growth in its gas transportation division due to higher capacity booked by Petronas.

- However, its gas processing division reported slightly weaker revenue YoY due to lower erformance-based structure income under the new Gas Processing Agreement effective 1 April 2014, but was partially offset by higher reservation charge.

- As expected, 9MFY14F net profit fell by 25% YoY to RM1,272mil. This was due to a higher base in FY13, where the group benefited from the Melaka RGT’s RM626mil investment allowance together. Stripping off the impact of the ITA, its net profit increased by 21%.

- We expect PGas to reach a final investment decision (FID) on the Pengerang RGT by the end of the year, following Petronas’ FID for the Refinery and Petrochemical Integrated Development (RAPID).

- 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 an FY15F PE of 24x, while dividend yield remains decent at 3%.

Source: AmeSecurities