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

- PGas’ FY14 net profit of RM1,843mil came in 7% above our and consensus estimates. However, this includes the recognition of one-off investment tax allowance (ITA) following the commissioning of all three blocks of the Kimanis Power Plant (KPP) that is recognised on the JV level. We expect contributions from the JV and associates to contract in FY16 due to the normalisation of tax rates.

- The group declared an interim dividend of 15 sen/share, bringing the total to 55 sen/share for the year (FY13: 55 sen), translating to a payout of 60%. We introduce FY17F earnings with a growth of 3%, underpinned by the stable recurring revenues of its main gas processing and transportation business.

- The group’s FY14 pretax profit grew by 24% YoY, mainly due to:-

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

(ii) 16% revenue growth in its utilities division due to higher offtake by customers and higher electricity tariff that started on 1 January 2014; and

(iii) higher share of net profit from its JV following the commissioning of KPP and ITA granted.

- However, FY14 net profit fell by 11% YoY, due to a higher base in FY13, where the group benefited from the Melaka regasification terminal’s RM626mil ITA. Stripping off the impact of the ITA, its net profit increased by 16%.

- The group’s next phase of growth will be contributed by the group’s second LNG regasification plant in Pengerang that was recently announced and targeted to be operational by 4QFY17. As the Pengerang RGTP’s capacity is similar to the existing Malacca regasification facility’s 530mil MMscfd, we expect the Pengerang RGTP to contribute approximately RM300mil per annum to the group’s EBIT upon commencement of operations.

- PGas will also be involved in the development of an air separation unit in a JV with Linde, which is expected to be used for the production of oxygen and nitrogen. A final investment decision (FID) is expected to be reached by 3QFY15 and is targeted to be completed by 4QFY18.

- The stock currently trades at an FY15F PE of 25x, while dividend yield remains decent at 2%-3%.

Source: AmeSecurities