Petronas Gas’ (PTG) business outlook continues to remain murky as a result of the uncertainties over the lack of clarity with regards to the gas transportation tariffs. We cut earnings to reflect lower tariffs at the gas transportation business but believe there could still earnings downside risk as a result of the gradual change in the regulated asset base (RAB) computation, albeit marginal on our revised forecasts. Post our earnings cuts, we lower our target price to RM17.30 but maintain our HOLD recommendation.

Risks on Gas Transportation Business

PTG is currently operating under the new gas transportation tariff in 2019 (known as the pilot year), while it is in the midst of submitting a proposed tariff for RP1 (2020-22) to the Energy Commission following the implementation of third-party access (TPA). PTG will also be gradually migrating from a depreciated replacement cost approach to net book value as the RAB. This has a greater impact on its gas transportation business (which made up 40% of total 2018 operating profit) due to the lower net book value of its Peninsular Gas Utilisation pipeline network as compared to its regasification assets, which are relatively newer.

Regasification Tariff Already Made Known

The Energy Commission has lowered the incentive-based regulation (IBR) tariff following the TPA implementation for Peninsular gas utilisation (from RM1.248/GJ to RM1.072/GJ), Sungai Udang regasification terminal to RM3.518/mmBtu and Pengerang regasification terminal to US$0.637/ mmBtu. Based on our estimates, this could have a 7% impact on the regasification business in 2019, which makes up 25% of the business.

Maintain HOLD

We cut our 2019-20E earnings by 4-8% to factor in the pilot gas transportation tariff in 2019 and a further earnings step-down based on the revised IBR in RP1. We maintain our HOLD call but lower our target price to RM17.30 (adjusting for a higher WACC of 7.8% from 7.1% and a lower terminal growth from 2% to 1%). PTG currently pays among the highest dividends of Petronas listed companies. Notwithstanding the current situation, we believe the dividend payout would sustain at a similar 70% level going forward. The current ~4% dividend yield will likely lend support to the share price, thus we see limited downside risk from current levels.

Source: Affin Hwang Research - 13 Mar 2019